Finance refers to the money that is available in a business to spend on their needs. Business finance needs come in all shapes and sizes; essentially, whenever there is business growth or someone has an idea for how a business can be improved, there is an inevitable need to find new finance to support it which is in addition to the ongoing finance required to run a business from day-to day. Following are some examples of the reasons a business needs finance.
• Starting a Business – starting a business requires finance to purchase of assets and materials and hiring employees. There is also a need to cover initial running costs before the business generates enough cash to pay for its ongoing operation.
• Operating the Business – a business will succeed or fail depending on whether its revenue exceeds its costs. There are, however, many calls on the cash flow of a business simply to operate it on a day-to-day basis including paying employees and suppliers. When there is a cash shortfall, such as while waiting for invoices to be paid, finance may be necessary to cover the operations of the business until the funds are received.
• Expansion – as a business grows it requires additional capacity to meet the needs of its customers. Expansion can also provide an opportunity for a business to improve its processes and use new technology to reduce its costs. While this can be an expensive undertaking initially, it is a necessary long-term investment that will save money over time and maintain competitive advantage.
• Develop New Products – in today’s fast-moving business environment a Business finance needs to update their products regularly to keep up with the competition. This requires financing the research and development costs of new products and testing them in the markets. The costs of product development are typically not covered by their sales revenue for some time and they require financing to bring to develop and bring to market.
• Enter New Markets – entering a new market can be an effective way to enable a business to expand. This can involve selling in a different geographical areas or targeting a new set of customers. In either case significant finance is required to research and sell to the new market in terms of marketing, setting up distribution channels and potentially modifying products.
• Acquisitions – sometimes the best way to expand is to buy another business that is operating in a similar, or adjacent, market. To do this a business will require significant funds for the purchase and financing is required to support these investments.