Finance is one of the most important issues in modern business management. This is because no business can be started or run effectively without adequate finance. Business firms need finance for a variety of reasons and purposes. In a very simplistic terms, finance is needed to start a business, to operate it and to make it grow. In more technical terms Orimolade et al (1987) posits that the various reasons for which finance is needed in firms can be broadly classified into two I.e
1. Finance for fixed capital investment
2. Finance for working capital requirement
Fixed capital investment may take the form of land and building,plant and machinery and other physical facilities needed either for starting a business or for its extension and diversification. Business expansion and diversification may not require additional fixed assets as enumerated above. It may instead require increased stock of raw materials and finished goods to meet the expect increase in the level of production and sales. In such circumstance, the finance needed is for working capital. Other samples of situations where finance is needed for working capital purposes include advertising and sales production Champaign and competitive credit terms. So, you see that finance, interpreted as money is very vital to the successful operation of a business because it represents the assets and resources used for the business operation. If Finance is interpreted to mean the management of money it’s role in business becomes even more significant. This is because as Henry Ford of the United States put it,”Money is like an arm or a leg, you either use it or lose it”. You will agree that no business wants to lose resources. But the firms ‘ resources represented by assets and working capital will certainly be lost if they are not properly managed. Hence the need to incorporate into any business organization an efficient management of the financial resources to ensure their most productive use. To this end the financial manager faces two major problems. The first is to determine how much the firm should invest and in what specific assets. The second problem is how to find the cash needed for the investment. The solution to the former problem constitutes the firm’s capital budgeting or investment decision while the solution to the latter problem constitutes the firms’s financing decision. These decisions are important because it is on them that the success, survival, ability and willingness to maintain production and to invest in fixed or working capital depend.
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