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What is Business Finance?

Important banking qna for banking aspirants, which is helpful in banking exam.

Apr 2, 2015 18:02 IST
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What is Business Finance?

  • Banking Finance deals with the provision of money for the commercial use.
  • The capital requirement of business may be divided into short and medium term or long term capital.
  • Short-term capital consists of the current liabilities of a business plus medium term capital.

The main sources of short and medium term capital can further sub divided into and external.

Internal: Retained Earning including accrued expenses and tax reserves

External: Temporary loans from sister companies, directors and other; factoring; bill of exchange; trade creditors; and short term Trade Investment

Short term capital should in theory only be used for investment in relatively liquid assets so that it is readily available to discharge the liability if necessary.

Thus, these sources of short term capital may be used for finished goods in stocks and work in progress, trade debtors, prepaid expenses, cash in hand and at the bank.

Similarly, Main sources of Long Term Liabilities or capital can be sub divided in the same way.

Internal: Reserves, retained earnings and Depreciation provisions

External: Share capital, i.e. Ordinary Shares, Preference Shares, Long Term Loans including Mortgages, Leaseback arrangement and Debentures.

Thus, these sources of long term capital may be used for long term investment in finished asset (land, buildings, plant, equipment and machinery etc.) in goodwill, patent and trademarks and long term trade investment.

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