Role of Finance for Businesses (SL IB Business Management)

• When starting a new business entrepreneurs need finance to cover initial setup costs
  • This may include acquiring equipment, renting or purchasing premises, conducting market research, hiring staff and developing a marketing strategy
     
• Businesses often require finance to fuel their expansion and growth plans
  • This could involve opening new locations, entering new markets, launching new products or services, and increasing production capacity 

Reasons why businesses need finance

Capital expenditure

• Businesses require finance for capital expenditure such as purchasing machinery, technology, vehicles, and infrastructure
  • These investments enable businesses to enhance productivity, expand operations and improve efficiency
    
    

Working capital

• Working Capital is necessary to manage the day-to-day operations of a business
• • It helps cover expenses such as purchasing inventory, paying suppliers, meeting payroll obligations and funding overhead costs like rent and utilities
  • Sufficient working capital ensures that a business can operate smoothly without facing cash flow issues
    
    

Research & development

• Businesses require finance for research and development (R&D)
  • Money is needed to invest in technical research and product development
  • This investment helps them to stay ahead of the competition and create new revenue streams
    
    

Marketing

• Effective marketing and advertising requires finance to develop and execute marketing campaigns, create advertising materials, conduct market research and build brand awareness
  • Investing in marketing helps attract customers, increase sales, and generate revenue
    
    

Risk management

• Businesses need finance to manage risks and protect against unforeseen events
  • This includes paying for insurance coverage, contingency funds and implementing risk management strategies 
    
    

Debt servicing

• Many businesses need to service debts such as loans or credit facilities
  • These debts, including interest, must be repaid over the agreed-upon period
     

Business performance

• Finance provides a metric to measure business performance
• • Business success is often judged by the level of profits it makes and the stability of a business can be determined by the level of working capital or liquid assets available

• Capital expenditure is business spending on non-current assets
  • These are assets which will be used many times and for more than one year
    
    
• Common examples of non current assets for which capital expenditure is required include

Examples of current assets for which capital expenditure is required

• Revenue expenditure is spending on goods and services that a business uses in the short-term as part of its normal trading activities
  
  
• Common examples of current assets for which revenue expenditure is required include

Examples of day to day costs for which revenue expenditure is required