TYPES, SOURCES AND APPLICATION OF FUNDS IN BUSINESS

Business is a serious venture that requires a serious and hard-working individual to start. It is a venture that risk-aversion person will never want to be associated with. According to Abraham (2003), “To achieve uncommon result in any business, vocation or career that you are in, you must be an adventurer, not a risk-averse person.” In business, you need to take risk to succeed, therefore in taking the risk, you need to source for find within or from sources outside your personal keeps.

The purpose of entering into business is to make a profit and remain in the business. Thus, in finding sources of finance, you need to take into account the cost of the fund vis-à-vis your profit. Any business that do not yield profit need not funded and might not attract financiers.

OBJECTIVES

At the end of this unit, you should be to:

• discuss financial need of a business 
• mention types and sources of funds 
• discuss sources of short, medium and long terms of funds. 

Estimating the Financial Need of a Business

In starting a business, the most important thing that needs to be Summary given attention is the finance. Money is the basis for any start of business; the sources of getting this money are limited in term of small-scale business unlike in the case of large-scale businesses that raise their money from equity or debt sources.

Another important issue you need to note is the usage of the word “Capital”. In a nonprofessional or business sense, capital means the amount of money you provide for starting a business. Nwoye (1994) sees capital as a fund employed in financing business operation, while Lyman, Keith, and Gubellini (1975) refer to capital as assets needed to operate a business. Capital might mean different thing to different people depending on the concept in which the word capital is used. To an Economist, capital means factor of production. Therefore, the word capital might not be loosely used but rather be conceptualised within the context it is used.

In a new business, you need to identify the following as the needs of the business before you could start the business. These are:

1. The capital to cover the initial cost of the business; 
2. Capital to invest into fixed assets (like machinery, motor, equipment building etc.); 
3. Working capital (to cover expenses like salaries, repairs, daily running of the business etc.); and 
4. Capital Reserves (money for exigencies or for the “raining day” as always term). 

Estimate means the forecast of a business operation in future at present, by deciding the budget of the business, which is the most important aspect of the management of a business. Budgeting means planning the activities of a business in quantitative statement, which is in figure. For the purpose of this unit, we shall classify budget into two types: operating and financial budgets. The operating budget consists of sales, materials, personnel, production and other operational activities of a business. This budget estimates the various activities that will be carried out under every operation of the business. On the other hand, the financial budget defines or forecasts the estimate of money receipts and payment made from the various operations. The financial budget reflects the effect of the firm’s financial position and earnings potential because of its operation.

SELF-ASSESSMENT EXERCISE 1

• Identify and explain the needs for starting a new business. ii. Explain the need for estimation in a new business.