The Importance of Finance for Business

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Business and commerce underpin our modern capitalist society and without having sound knowledge of the various underlying financial principles it is likely that you will struggle to make headway in the modern world. Whether you own your own business or work for an employer, it is necessary to understand how the banking system works, how credit can be granted, and the difference between assets and liabilities, otherwise you will not be able to finance your business to its full potential and it will suffer.

Here we are going to take a look at the importance of finance for business.

To Start a Business

In order to start a business, you must have some capital in the first place, which sounds obvious, but many people jump in and expect to generate an income out of thin air. You will need capital to buy your very first products, or to start the manufacturing process. You will then need to pay staff costs, rent an office or stockyard, and pay your utilities.

It is therefore essential to remember that you will not generate any cash flow at the outset, so financing is key if you don’t want to face financial ruin before you have even started. Forecasting is going to be paramount if you want to make sure you can walk before you can run, and don’t forget there is no bigger incentive than getting to the point when you can finally pay yourself, so make sure your business is well-capitalized from the outset.

To Expand

There always comes a point in a business’s life that it is ready for expansion yet you don’t quite have the funds to do so. You can see the tantalizing possibilities of a new avenue to earn more money, but yet you don’t know how to get there. Well, in this instance, the loan market is your friend, because there are many different options open to you to borrow funds to finance your expansion.

For a novice,  it is not wise to jump in without doing your research, says James at, because there are so many different products available that you need to understand repayment terms and interest rates in order not to make any mistakes. Once you have secured your funding, you can put your plans into action and can drive your business to another level.

To Develop New Products

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Developing new products is never easy and can take an enormous amount of time due to trial and error, needing to wait for feedback from potential customers, and the actual manufacturing process.

Whilst you are developing the products you will have no income related to then so will have to bear staff, and research and development costs and this can ultimately drive a business under if not done the right way. It is, therefore, wise to seek funding options as you are going to need capital to help you through this phase if you want to be financially healthy by the time you launch your new product.

To Fund an Acquisition

Sometimes developing new products and growing organically isn’t enough as you may spot a weak competitor and think that their products could complement your business perfectly. In this scenario you are probably thinking that you would like to acquire the rival business, but how would you do this?

Well, you could take out a loan, but this will burden yourself with debt and lead to heavy repayments, so why not consider offering shares of the expanded business as payment? This way you have no capital outlay and yet you have the earnings potential of the acquired business. Ok, you will give up equity, but if the risk/reward ratio works then it can be a very attractive position all round.

To Move Premises

Maybe the drive to develop new products and acquire a rivals business has meant that you have outgrown your current premises? Well, at this stage of your business’s development it should be easy to rent or purchase a new large property by applying for a business mortgage from a bank. Yes, it is a form of a loan, but it won’t be punitive, and it leaves free your cash flow to concentrate on driving your business further forward.

As we have learned finance is integral if you want to grow your business as it is necessary for every step of its evolution. Capital is required at the outset until you have a reliable sales income, and then if you want to conduct any research and development you will need financing to help you through this period. The lesson here is that if you use the available financing mechanisms available to you, you will help your business become as successful as it possibly can be.

Interesting related article: “What is Business Finance?