Business finance is a general term for a field of activities regarding the study, creation, management, and investment of financial resources. In simple terms, business finance describes how companies use their available funds to acquire goods, make loans, and pay employees. The available resources may come from profits earned by the company, from bank loans, from other investors, or from both sources. The available funds in a business will usually be short-term in nature. There is no planning or long-term strategy for using these funds except for what is needed for specific purposes.
Some of the business finance activities that take place during a typical fiscal year are the following: Obtaining merchant credit; satisfying liability and debt obligations; constructing or expanding facilities; investing in inventory, land, and assets; and marketing products and services to customers. These activities must be conducted with sufficient cash flow so that the enterprise can achieve its goals. Cash flow is the ability of a business to receive payments from customers on time. The absence of adequate cash flow can result in failure to meet objectives and to meet obligations as well as create a negative cash flow picture.
To conduct effective business finance, a manager must be able to understand the financial instruments owned and operated by the company. He must be aware of the risks associated with each type of instrument and the means used to reduce those risks. A financial manager must also have a good understanding of the motivation and thought processes of employees. Together, these factors help to guide the manager in the making of sound financial decisions.