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:
- Debt: The funds collected from the external forces or outsiders are known as Debt finance.
- Equity: The money acquired by the internal source of business.
Sources of finances under these two major heads are as follows:
Debt finance: It includes the following:
- Financial institutes: Are the Banks, credit unions or associations providing loan for short and long period of time in return of a fixed amount on a monthly basis known as interest.
- Retailers: Credits are provided by the retail store on the purchase of furniture, machinery or technology. The interest is very high in this source.
- Finance companies: These companies provides loan to the customers via retailers. The registration of such companies is compulsory.
- Family, friends or associate: The loans can also be taken by the friends and family. These are the closest people of our lives; therefore, the finance process must be transparent to avoid any problem in future.
Equity Finance: It includes:
- Personal savings: It is the first and most importance source of finance. Everyone wants to start business with his personal savings or property. In fact, before agreeing to give finance, the investors or lenders will check the amount of personal money invested in the business operations.
- Family or friends: The family members or friends can also be source of equity finance. The person can acquire funds from these people by offering a partnership or share in the business. However, the option must be selected after planning in order to maintain the healthy relations.
- Stock markets: The large scale organization usually adopts this source. It is also known as IPO. In this, the shares of the company are offered to the public to raise the capital for the business activities. It is a risk and expensive source of raising finance.
- Government: Although the government do not provide any loan to new or existing organizations. But in certain cases, under some government schemes, it can render funds for the business activities like R&D, expansion or export.
- Venture Capitalist: In general, they are mainly the large organizations who provide financial help to the new startup businesses. It acquires the controlling power of the organization and provides industrial guidance and expertise.
- Private investors: There are some private investors who provide loans in return of some share in the profits of the company.
TYPES OF FUNDING
Various types of funding are available, but they all are a part of three main categories:
- Restricted funds: These are used for some particular activity. Businesses separate and secure some amount of money for special tasks.
- Unrestricted Funds: These funds can be used for any activity which is important for the business. These funds are generally collected public through the fundraising or charity or from any organization.
- Bridge funding: Is used to meet the short term goals. It is also known as temporary funding. It is basically used during the critical situations like natural disasters, political tension etc.
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.