Business finance is the area of the business that deals with the expenditures of a business in terms of purchases as well as its financing. Finance is also a discipline that studies the effect of changes in the availability of credit to a business’s resources and income from these resources. In addition, it studies the effects of external circumstances like inflation and interest rates on the cost of doing business. It is necessary for any firm to study and plan for its finances so that it can be prepared for any change in the financial circumstances. The study of business finance is also essential because of the numerous regulations and rules that govern the conduct of business enterprises. There are some principles that have been adhered by many business ventures and most of these principles need to be accepted by all firms as the rules governing their business dealings.
The major areas of business finance are accounts receivable, accounts payable, capital expenditure, working capital, and financing growth. All the three are related with each other and are effected by the accumulation or deficit of funds among the different resources of a firm. When one of these areas is not able to sustain the normal operations of the firm, then it will trigger a demand for funds that will result in the accumulation of debts and the consequent inability of the firm to carry on its normal functioning. As capital goods are directly related with production, there will be a definite decline in the productivity levels as a result of increased costs. Since this condition cannot be sustained for a long period of time, it will eventually lead to crisis and will have to be rectified through effective and quick financial decisions.
Cash flow is one of the major components of business finance. Cash flow is an essential tool for analyzing the profitability of a business. It can be analyzed by looking at the total assets, total liabilities, and the net worth. The value of the net worth will show the overall picture of a firm and help it to decide whether it should borrow funds or sell its assets and generate cash for its current needs. It is important for any firm to maintain cash flow as it can help it to achieve financial objectives easily.