BASIC CONCEPTS, PRINCIPLES, AND APPLICATION OF BUSINESS FINANCE

When you are running a business whether one-man or partnership, it is important that you ensure that the business does not run out of money before it is able to deliver its products or services to the final consumers. According to Heller (2002), “In managing a company or project, it is vital to ensure that it does not run out of money before it was time to sell its products or services and receive payment.”

Finances are the main lifeline of any business. In the absence of money, business cannot be sustained. Therefore, the source of a continuous flow of money needs to be established for a business to survive.

OBJECTIVES

• At the end of this unit, you should be able to: 
• explain why business needs continuous flow of money 
• explain how money can be sourced 
• explain how cost and profit from business can be shared 
• mention other ways of raising money for business. 

The Need for Adequate Finances

To start any form of business, there is need for some working tools. For instance, a woman who wants to sell fish needs a table, knife, cold-room and weighing scales with which to work. These items mentioned are referred to as capital (that is if the business wishes to retain them for more than one year), and therefore, a decision has to be taken whether to buy or lease them. If they are bought, then they are referred to as capital for the business. The money needed for the day-to-day running of the business is called working capital. Buying or leasing working tools for a business, is usually determined by the cost of the capital; if it is cheaper to lease than to buy, then it will be advisable to lease rather than buy. The cost of stocks of fish (the inventory) that is, the amount of fish which a fish seller needs to keep should be calculated alongside the running cost of the business for the days or weeks before her customers could come to buy or pay.

In financing a business, it is always advisable to know how much money the owners can put into the business, how much can be borrowed from the banks or other financial institutions. For sustainability, the general rule in business is to:

• use long- term finances to finance long-term investments; · use short-term finances (overdraft, short term loans) to finance short-term investments; and 
• short-term finances should not be used to finance long-term investments. 

SELF-ASSESSMENT EXERCISE 1

• Identify the two different ways of financing a business.