FINANCIAL NEEDS OF A BUSINESS

FINANCIAL NEEDS AND SOURCES OF FINANCE OF A BUSINESS 

Financial Needs of a Business

Business enterprises need funds to meet their different types of requirements. All the financial needs of a business may be grouped into the following three categories:

(i) Long-term financial needs: Such needs generally refer to those requirements of funds which are for a period exceeding 5-10 years. All investments in plant, machinery, land, buildings, etc., are considered as long term financial needs. Funds required to finance permanent or hard core working capital should also be procured from long term sources.

(ii) Medium-term financial needs: Such requirements refer to those funds which are required for a period exceeding one year but not exceeding 5 years. For example, if a company resorts to extensive publicity and advertisement campaign then such type of expenses may be written off over a period of 3 to 5 years. These are called deferred revenue expenses and funds required for these are classified in the category of medium term financial needs.

(iii) Short- term financial needs: Such type of financial needs arises to finance current assets such as stock, debtors, cash, etc. Investment in these assets is known as meeting of working capital requirements of the concern. The main characteristic of short term financial needs is that they arise for a short period of time not exceeding the accounting period. i.e., one year.