Small Business Finance

Each business despite of its size and operation may be viewed as a financial entity. Business management is confronted with decisions and issues which have main financial implications. Queries must be replied like:

• What type of machinery and plant should the firm buy?
• How should the firm increase finance?
• How much should the firm spend in inventories?
• What shall the firm’s credit policy be?
• How should the firm measure and monitor their financial performance?

Business finance is mostly concerned with the achievement and the fund utilization by the firm. Their scope may be defined in the following question terms:

• How big should the firm be and how rapidly should it grow?
• What should be the merge of the financing of the firm?
• How should the firms study, plan and manage its financial affairs?

Commonly, finance of business rests on the premise that the goal of the firm should be to maximize the firm’s value to its equity shareholders. What will be the explanation for this goal?

It appears to give a rational guide for business decision making and support efficient resources allocation in the economic system. Savings are allocated mainly on the basis of expected profit and risk and the market value of firm’s equity stock reproduce the risk return trade off of the investors in the market area.

But when the firm increases the market value of their equity stock, they ensure that their decisions are reliable with the risk return preferences of the investors. This indicates that it allocates resources optimally.

If the firm doesn’t follow the objective of shareholder wealth maximization, it means that its actions effect in sub optimal allocation of resources. This leads to insufficient capital formation and lower economic growth rate.