Business Finance
Business finance is the process of managing funds in a business to support operations, investments, and growth.
Business finance refers to the area of financial management that deals with the planning, acquiring, and managing of funds necessary for business operations and investments. It encompasses key decisions related to how funds are used (investment decisions), how funds are acquired (financing decisions), and how both aspects are integrated in complex business scenarios, such as mergers or expansions.
Financial management encompasses many different types of decisions.
We can classify these decisions into three groups:
- Investment decisions
- Financing decisions
- Decisions that involve both investing and financing.
Investment decisions are concerned with the use of funds-the buying, holding, or selling of all types of assets. For instance, decisions may include whether to purchase a new die stamping machine, introduce a new product line, sell the old production facility, acquire an existing company, build a warehouse, or retain cash in the bank.
Financing decisions are concerned with the acquisition of funds to be used for investing and financing day-to-day operations. Management must consider whether to utilize internally generated revenues or to seek external sources of funds. External financing may involve incurring debts, such as bank loans and bond issuance, or selling ownership interests. Each financing method imposes different obligations on the business, making these decisions critically important.
Many business decisions simultaneously involve both investing and financing decisions.
For example, a company may wish to acquire another company-an investment decision. However, the success of the acquisition may depend on how it is financed: by borrowing cash to meet the purchase price, by selling additional shares of stock, or by exchanging its shares of stock for the stock or assets of the company it is seeking to acquire.
If management decides to borrow money, the borrowed funds must be repaid within a specified period of time. Creditors (those lending the money) generally do not share in the control of profits of the borrowing company. If, on the other hand, management decides to raise funds by selling ownership interests, these funds never have to be paid back. However, such a sale dilutes the control of (and profits accruing to) the current owners.
