Role of Finance for Businesses (DP IB Business Management)

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