what is the meaning of business finance?
Finance Introduction After looking at the introduction to finance, let us explain the meaning of finance in this session.
We shall also look at the types of finance available to businesses and the role of finance to businesses as well. It is important that we take the course in finance seriously because it is needed in every business organization.
By the end of this Article, you should be able to:
(a) explain the meaning of finance
(b) describe business finance
(c) identify the types of finance
(d) discuss the role of business finance
2.1 MEANING OF FINANCE
Finance may be defined as the art and science of managing money or funds. Finance can also be defined as the science of money management. It is the provision of money at the time when it is needed and includes activities such as investing, borrowing, lending, budgeting, and forecasting.
The finance function is the procurement of funds and their effective utilization in business concerns. The concept of finance includes capital, funds, money, and amount. Studying and understanding the concept of finance has become an important part of every business concern and other stakeholders as well.
2.2 DEFINITION AND MEANING OF BUSINESS FINANCE
According to B.O Wheeler, ‘business finance is that part of the business activity concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of business enterprise’ In the words of Parhter and Wert, ‘Business finance deals primarily with raising, administering and disbursing funds by privately owned business units operating in non-financial fields of industry’.
In the context of business, we shall also refer to business finance as financial management. What then is financial management?
Financial management is an integral part of overall management. It is mainly concerned with the effective funds’ management in the business. According to J.F Bradely, financial.
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management is the area of business management devoted to judicious use of capital and careful selection of sources of capital in order to enable the spending unit to move in the direction of reaching its goals. Thus, its focus on ensuring that business activities are not affected due to lack of available funds as and when required.
In the words of J.L Massie, financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for the efficient operations of the entity. It is thus concerned with the efficient utilization of important economic resources.
Weston and Brigham also defined financial management in simple terms as an area of financial decision-making that harmonizes individual motives and enterprise goals.
Thus, Financial Management is mainly concerned with effective funds’ management in the business. In simple words, Financial Management as practiced by business firms can be called Corporate Finance or Business Finance
Corporate finance is concerned with budgeting, financial forecasting, cash management, credit administration, investment analysis and procurement of funds for business activities and other business needs necessary for the business to adopt modern technology and application suitable to the global competitive environment.
According to the Encyclopaedia of Social Sciences, “Corporation finance deals with the financial problems of corporate enterprises.
These problems include the financial aspects of the promotion of new enterprises and their administration during early development, the accounting problems connected with the distinction between capital and income, the administrative questions created by growth and expansion, and finally, the financial adjustments required for the bolstering up or rehabilitation of a corporation which has come into financial difficulties”.
In this regard, financial managers must see to the effect that funds are procured in a manner that risk, cost, and control considerations are properly balanced in any given situation and that there is optimum utilization of funds for the sole benefit of the organization.
2.3 TYPES OF FINANCE
Finance plays a major role in all aspects of business activities, hence, making it an important and integral part of every business concern in the contemporary world. Finance can be broadly classified into two major parts: Private finance and Public finance.
Private finance – This includes funds provided by individual investors, firms, corporate financial institutions to finance business activates as and when required.
Public finance – This includes revenue and disbursement of governments such as the central government, state and municipal assemblies as well as state-owned enterprises. 2.4 The Role of Business Finance Businesses are, in effect, investment agencies or intermediaries.
This is to say that their role is to raise money from members of the public, and from other investors, and to invest it. Usually, money will be obtained from the owners of the business (the shareholders) and from long-term lenders, with some short-term finance being provided by banks (perhaps in the
form of overdrafts), by other financial institutions, and by other businesses being prepared to supply goods or services on credit (trade payables (or trade creditors).
Businesses typically invest in real assets such as land, buildings, plant, and inventories (or stock), though they may also invest in financial assets, including making loans to, and buying shares in, other businesses.
People are employed to manage the investments, that is, to do all those things necessary to create and sell the goods and services in the provision of which the business is engaged. Surpluses remaining after meeting the costs of operating the business – wages, raw material costs, and so forth – accrue to the investors.
Of crucial importance to the business will be decisions about the types and quantity of finance to raise, and the choice of investments to be made. Business finance is the study of how these financing and investment decisions should be made in theory, and how they are made in practice.
2.5 A PRACTICAL SUBJECT
Business finance is a relatively new subject. Until the 1960s it consisted mostly of narrative accounts of decisions that had been made and how, if identifiable, those decisions had been reached.
More recently, theories of business finance have emerged and been tested so that the subject now has a firmly based theoretical framework – a framework that stands up pretty well to testing with real-life events. In other words, the accepted theories that attempt to explain and predict actual outcomes in business finance broadly succeed in their aim.
Business finance draws from many disciplines. Financing and investment decision-making relate closely to certain aspects of economics, accounting, law, quantitative methods, and the behavioral sciences. Despite the fact that business finance draws what it finds most useful from other disciplines, it is nonetheless a subject in its own right.
Business finance is vital to the business. Decisions on financing and investment go right to the heart of the business and its success or failure.
This is because:
- such decisions often involve financial amounts that are very significant to the business concerned;
- once made, such decisions are not easy to reverse, so the business is typically committed in the long term to a particular type of finance or to a particular investment.
Although modern business finance practice relies heavily on sound theory, we must be very clear that business finance is an intensely practical subject, which is concerned with real-world decision-making.
You have been able to complete this session so fast. Maybe this is because you are understanding the concepts and they are becoming very interesting to you. In this session, we defined finance and business finance.
We then looked at the types of finance and the role of business finance. We ended the session with the practical aspect of business finance. You did well. Keep it up
By: Eric Adjei
A professional with six (7) years’ experience in finance and accounting. Demonstrating expertise in accounting procedures, computerized accounting system management and financial operations. Financially astute with excellent analytical, problem solving, management, people supervision, organizational, business administration, operation and commercial management and teaching skills.