BUSINESS FINANCE: BASICS
Business Finance is the activity related to the identification, acquisition and allocation of finance or funds to meet the monetary needs and to achieve the targets of the organization.
Finance is the ultimate requirement of every business to carry out its operations and to achieve the aims of the company. Without the finance or money, none of the activity can be carried out. Every action or functions of a business requires money, right from the acquisition of land, machinery, raw material, to the payment of salary to the employees. Each and every task needs fund to operate. Hence it is very important for every business to plan and manage its financial resources in the most efficient manner.
Finance can be collected or generate from the various sources. But the two major sources of finance are:
Sources of finances under these two major heads are as follows:
Debt finance: It includes the following:
Equity Finance: It includes:
TYPES OF FUNDING
Various types of funding are available, but they all are a part of three main categories:
STAGES OF FINANCE/FUND RAISING
Fund raising can be a continuous process for many organizations. Funds are necessary to execute each and every activity of business. Funds are generated from various sources. But before its acquisition, it is very important for every company to understand the different stages of finance to fulfill the needs and requirement of each department and levels of the organization.
The first or the earliest stage of fund raising is known as “seed capital”. The amount which is required at the ides or planning stage to carry out the R&D activity is called seed capital. This amount is invested by the founder of the business. They can invest their own money or can take it from the friends or family. Government can also help the new startup companies by investing in R&D.
The next phase or stage is called “A” round. This stage signifies that some development has been made. Generally the amount is invested by the venture capitalist, private investor or government agencies like BDC (Business Development Bank of Canada), Or IADF (Investment Accelerator Fund).
Sometimes, the amount invested in the “A” round may not be sufficient for the business to carry out all of its activity; the company may need additional funds. Extra funds are mainly required to execute the sales and marketing activities. Banks, government or credit societies may provide loans to the businesses.
The last stage is called expansion capital. Up to this stage, the business has been settled. If the business earns profits, then the profits can be reinvested in to the company, but if it earning average amount, then the additional amount can be needed for the expansion of the business. Expansion Capital is provided by the banks, venture capitalist, partners, and by the public through IPO (Initial public offering) of shares.
Finance is very important to execute the planning process of business. There may many sources of raising the funds, but it is very important to study and analyze each source before making the final decision. The sources must be finalized after evaluating the business terms, nature, scale of operations, target market, and type of product or services being offered by the business. The amount taken from various sources has to be returned by the business. Hence, careful selection of fund sources is a very important decision to be made by the founder or the owner of the business.