Good morning everyone. Today we are going to talk about a topic that is absolutely vital for every business — business finance. Whether it is a small start-up or a global company, every business needs money to operate. By the end of today’s lesson, you will understand why finance is needed, the difference between short-term and long-term finance, the difference between cash and profit, and what happens when a business does not have enough finance.
Let’s begin with the most basic question: why do businesses need finance? The simple answer is that finance is the fuel that keeps a business running. Without it, even the best ideas cannot turn into reality. Businesses need finance for three main reasons: to start up, to grow, and to survive.
First, when a business starts up, it needs money to get off the ground. Think about all the things a new business has to buy — equipment, furniture, inventory, maybe a shop or office, and marketing to attract customers. This money is called start-up capital. For example, a new tech business may need money to design a prototype, pay developers, and launch its first app. Without finance, none of that can happen.
Second, businesses need finance to grow. Once a business is established, it may want to open new branches, develop new products, or enter new markets. Growth always costs money. Imagine a restaurant that is doing really well in one city and now wants to open in three more. It will need finance for new locations, staff, and marketing to reach new customers. This is known as growth finance.
Third, even successful businesses sometimes need finance simply to survive. There might be times when sales are low or costs suddenly rise. Finance helps the business pay its bills, wages, and rent during tough times. For instance, during the COVID-19 pandemic, many small businesses needed loans just to stay open and cover their running costs.
Now let’s look at short-term and long-term finance. This is about how long the money is needed for. Short-term finance is used to cover day-to-day expenses like paying suppliers or managing cash flow. Examples include overdrafts or trade credit. On the other hand, long-term finance is used for bigger, long-lasting investments, such as buying property, machinery, or vehicles. This might come from bank loans, selling shares, or issuing debentures. Understanding the difference helps a business choose the right source for the right purpose.
Another really important idea we need to understand is the difference between cash and profit. Many businesses fail not because they do not make a profit, but because they run out of cash. Profit is what is left after subtracting all costs from revenue. Cash is the actual money available to pay bills and keep the business running. A business can be profitable on paper but still have no cash to pay its employees if that money is tied up in stock or customers who have not paid yet. So, good cash flow management is just as important as making a profit.
What happens if a business does not have enough finance? Unfortunately, this can lead to serious problems. There are three possible outcomes: bankruptcy, liquidation, and administration. Bankruptcy happens when a person or business is legally declared unable to pay its debts. Liquidation is when a company’s assets are sold to repay creditors and the business closes down. Administration is slightly different. It is when the business is taken over by administrators who try to save it and reorganise it before it reaches the point of closing. All three are signs of poor financial management or bad luck, and they show how crucial finance is for survival.
To conclude, every business needs finance — to start, to expand, and to stay alive. Businesses must also choose the right type of finance, understand the difference between cash and profit, and plan carefully to avoid financial trouble. Without proper financial management, even successful businesses
