Need of financial management in business

The objective behind this assignment is to establish the importance of financial planning in business, usefulness of different sources of finance and the impact of finance on the financial statements. It is a well-known fact that business financing is the basic requirement in order to set up a business in the form of capital. However, a business may require additional funds to carry out its day to day functions. Financing requirements can be fulfilled from various sources such as capital markets, loans from banks, retained earnings, government grants, and venture capital, loan stock and etc. It is also important to consider how much fund is required and when it is needed and also the fund that an organization required depends upon the type and size of the organization. Equity financing and debt financing are the two major sources of finance. Equity financing refers to the sale of ownership interest to raise funds for the development of the organization and is the process of raising funds through by issuing shares. Being the most costly source of finance it involves payment of dividend to the shareholders from

the net profit after the payment of all government taxes, interest on debt and preference dividend. There is always the risk of nonpayment of dividend and it works as a base for creating the debts and load capacity of the organization. Debt financing, being the process of borrowing funds from the outsiders carries a promise by the organization to pay a fixed amount of interest at a specified time and also repay the principal amount at the specified time. Debt financing could be secured or unsecured in which secured debts carry a charge on valuable assets of the company in case of any default made by the borrower whereas no charge is carried by unsecured debts on the assets of the company. Along with long-term financial resources, companies or businesses also need short-term finance to cover their day to day running cost. Some of these are trade credit which is allowed in connection to the raw materials used by the manufacturer in producing its products, accrued expenses refer to the services availed by the company but for which payment is still not made, commercial papers are purchased by the commercial banks and other financial institutions and are unsecured promissory notes issued by the company to raise funds for a short period of time varies from 15 days to 1 month, inter-corporate deposits can be defined as borrowing fund for short-term period from another company which has surplus liquidity. Long-term finance sources are very much important as it helps any organization to create the assets and infrastructure. Some of them are equity share capital which is the basic source of finance for any company and refers to the sale of an ownership interest to raise funds for the enterprise and also the equity shareholders enjoy the voting rights in the company’s affairs, preference share capital represents the ownership interest to raise funds for the enterprise, debentures which are issued by the borrowing company are basic debt instrument carrying an interest.