In the last post, we've discussed in debth on business financing and how you can actually go about it. It becomes inportant to understand the concepts of finance before you make a choice on the method to adopt in financing your business. So Let go on...
Finance can be referred to as discipline that concerns with study of use and management (application) of all means of settlement (money) available to the business organization.
Finance includes the function of
1. Procurement of money
2. Management for effective discharge of the above function
In a modern business organization, finance is more than money but also other instrument such as promissory note, commercial note, credit facility, bill of exchange etc.
All this are known as near money. It is now the important role of financial manager to source and adequately choose the appropriation source of fund in other to generate income to the business organization as well as effective use of the money generated to bring good return to the owner’s wealth.
Sources of finance or capital to the business
Business can be mathematically expressed in the equation below
1. ASSET= CAPITAL
It denotes that where the owner of a business single handedly finance his business without borrowing money from any other person
2. ASSET= CAPITAL+LIABILITIES
The second equation express that the owner of the business cannot himself only finance the activity of the business, he needs other people to finance to business for him either by borrowing or selling part of his shares to the general public.
Major Principal Form or sources of finance
1. Internally generated fund
The following ways of raising fund internally are:
a. Money contributed by the owner
b. Ploughing back of the previous profit
(Using of previous profit made in the last accounting year which is 1year
Externally generated fund)
c. Disposal of an asset
2. Externally generated fund
a. Short term borrowing from bank
b. Mortgage financing
c. Borrowing from friends and relative
Uses of money
a. Purchase of long term investment:
The acquisition of fixed asset implies that the business fund has been invested in the assets which are expected to be used for a reasonable period of time, it includes assets such as building, machinery, furniture and fitting, motor vehicle and acquisition of shares.
b. Payment of interest
The interest due on short term and long term has to be settled in cash and part of the fund will be used for this purpose.
c. Payment of ordinary expense
Wages and salaries, insurance, light and healing, purchase of raw material, electricity bills, depreciation of fixed asset are expected to be paid for and the funds or money generated can be partly used for this expenses.
d. Payment of long term loan
The funds may be used to retain the capital value of the debenture or present shares on the maturity of the debt since debentures, stock or preferential share capital may be redeemable.
e. Payment of cash dividend
Profit is the excess of income generated for the business, the excess of income over the operational cost can be used to pay dividend to the shareholder.
f. Payment of tax lab
It is required of company to pay corporate tax or company tax with the requirement of company income tax Act to the federal board of Inland Revenue.
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