Role of Finance for Businesses (DP IB Business Management)
Revision Note
Written by: Lisa Eades
Reviewed by: Steve Vorster
The Importance of Finance
When starting a new business entrepreneurs need finance to cover initial setup costs
This may include acquiring equipment, renting or purchasing premises, conducting market research, hiring staff and developing a marketing strategy
Businesses often require finance to fuel their expansion and growth plans
This could involve opening new locations, entering new markets, launching new products or services, and increasing production capacity
Diagram: why businesses need finance
Capital expenditure
Businesses require finance for capital expenditure such as purchasing machinery, technology, vehicles, and infrastructure
These investments enable businesses to enhance productivity, expand operations and improve efficiency
Working capital
Working Capital is necessary to manage the day-to-day operations of a business
It helps cover expenses such as purchasing inventory, paying suppliers, meeting payroll obligations and funding overhead costs like rent and utilities
Sufficient working capital ensures that a business can operate smoothly without facing cash flow issues
Research & development
Businesses require finance for research and development (R&D)
Money is needed to invest in technical research and product development
This investment helps them stay ahead of the competition and create new revenue streams
Marketing
Effective marketing and advertising require finance to develop and execute marketing campaigns, create advertising materials, conduct market research and build brand awareness
Investing in marketing helps attract customers, increase sales, and generate revenue
Risk management
Businesses need finance to manage risks and protect against unforeseen events
This includes paying for insurance coverage, contingency funds and implementing risk management strategies
Debt servicing
Many businesses need to service debts, such as loans or credit facilities
These debts, including interest, must be repaid over the agreed-upon period
Business performance
Finance provides a metric to measure business performance
Business success is often judged by the level of profits it makes and the stability of a business can be determined by the level of working capital or liquid assets available
Capital Expenditure
Capital expenditure is business spending on non-current assets
These are assets which will be used many times and for more than one year
Common examples of non current assets for which capital expenditure is required include
Diagram: capital expenditure
Revenue Expenditure
Revenue expenditure is spending on goods and services that a business uses in the short-term as part of its normal trading activities
Common examples of current assets for which revenue expenditure is required include
Diagram: revenue expenditure
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