Finance Basics

Topics: Balance sheet, Inventory, Generally Accepted Accounting Principles Pages: 17 (5212 words) Published: October 27, 2014
What is Finance?

Finance is allocation of assets and liabilities over period under various circumstances. The utmost important point in finance is time valuation in terms of money, like the value of currency today has more value when equated to same unit of currency tomorrow. Finances main objective is valuate assets in according to their level of risks and projected rate of return. It directly or indirectly refers to the involvement of money.

The term finance formulates numerous and incalculable definitions. However, it is challenging to deliver a faultless definition for finance. A few statements will aid in comprehend its wide meaning:

Finance in common terminology means management of cash or other valuables, which can be transmuted into money. In broader term finance is the science of funds management. Finance involves inflow of money and often outflow of money.

Simon Andrade, defines the term finances of the following ways: 1) "Area of economic activity in which money is the basis of the various embodiments, whether stock market investments, real estate, industrial, construction, agricultural development, so on. ", and 2)" Area of the economy in which we study the performance of capital markets and supply and price of financial assets " According to Bodie and Merton, finance "study how scarce resources are allocated over time" For O. Ferrel C. and Geoffrey Hirt, the term finance refers to "all activities related to obtaining money and effective use” Features of Finance

Importance of Finance
-Necessary to start business
-Aids expansions of the business
-Finance is required as a part of working capital for the businesses -Finance is also required for research and development.
-In addition, a solid financial base benefits the business earn goodwill. -A solid financial base aids the business increases consumers and investors’ confidence on the business.  
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Identify the sources of finance available for the business?
Sources of finance can be allotted into two categories Internal and external source of finance.

Internal sources of finance

Self-Financing/Own investment - one of the ways to start-up a business is by investing personal saving or any other kind of investment into the business as start-up capital.

Friends and family – this is a favorable source of finance as you can gather finance from some friends and family, they can be willing more than other to invest. It is done on legal basis by an agreement.

External sources of finance
Bank Overdrafts – is where the bank agrees to lend money to the business up to a certain agreed limit and interest rates. The interest rates are very high and it is a short- term source of finance.

Bank Loans – is where money is borrowed from a bank, which is to be paid back over a period with the agreed interest rates. They vary depending over the sum of money you borrow and have different repayment time.

Business Angels [Individuals with high net worth] – are people who are interest in your business, they may be affiliated directly or indirectly, they are people invest in your business if they see potential. In exchange, they require certain amount of profit or a piece in business Which will be valuable in future.

Hire purchase – this is about first short deposit and then monthly payments/instalments and after the completion of all the payments, the asset is owned by the business.

Partnership – one of the best source of finance for start-up businesses as the amount invested is not to be repaid. Details of Partnership according to UK’s Partnership Act 1890, which imply to all partnerships until and unless partners have agreed to vary the terms -: •All partners are entitles to contribute equally to the capital of the partnership. •Partners are not entitled to interest on the capital they have contributed. •Partners are not entitled to salaries.

Partners are not to be charged interest on their drawings. •Partners will share...
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