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Principles of Business Finance

The document discusses five key principles of business finance: 1) Full utilization of funds to avoid wastage and ensure adequate returns. 2) Maximization of returns on investments by using funds rationally for value addition and profit. 3) Ensuring the survival and prosperity of a business unit through stable financial management and progress over time. 4) Maintaining a fair balance between liquidity and profitability for healthy cash flows and increased profits. 5) Developing a good public image by benefiting employees, shareholders, customers and the community.

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Vishal Gaonkar
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457 views2 pages

Principles of Business Finance

The document discusses five key principles of business finance: 1) Full utilization of funds to avoid wastage and ensure adequate returns. 2) Maximization of returns on investments by using funds rationally for value addition and profit. 3) Ensuring the survival and prosperity of a business unit through stable financial management and progress over time. 4) Maintaining a fair balance between liquidity and profitability for healthy cash flows and increased profits. 5) Developing a good public image by benefiting employees, shareholders, customers and the community.

Uploaded by

Vishal Gaonkar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Principles of Business Finance

Business finance is a function used to manage a company's physical and financial resources.
The need for efficient and effective business finance in the managing of the financial and
physical resources of any business calls for the application of various and proven financial
principles. It is a practice for various business organizations to utilize the basic principles of
finance with business formulas when considering investment related decisions. Principles
offer guidance to business finance managers in discharging their duties, and are discussed as
follows:

(1) Full Utilization of Funds:

This principle of business finance suggests that whatever funds collected for business should
be utilized properly and fully. The wastage or misdirection of funds should be avoided. This
ensures adequate return on the funds invested. This means the funds should be gainfully
employed for better return in terms of profit.

(2) Maximization of Return on Investment:

This principle business of finance suggests that the funds collected from different sources
should be utilized in the best manner. Funds provide maximum/highest return when only
they are used in a rational manner. There should be value addition to the funds invested in
the business. This will be in the form of return or profit available. In brief, the investment of
funds in the business must be rewarded properly/ fairly.

(3) Survival and Prosperity to a Business Unit:

This principle of business finance suggests that financial management should bring stability
to a business unit. It should be able to remain in the business over a long period. In addition,
the financial management should lead the business unit towards progress and prosperity in
terms of sales, profit or market reputation. The funds of the company should be invested
with proper care and caution so as to minimize the risk and ensure high return over years.

(4) Fair Balance between Liquidity and Profitability:

This principle of business finance suggests that there should be adequate cash flow to meet
the regular expenses of the company. In fact, profitability increases due to healthy cash flow
position. A company should not try to raise profitability at the cost of liquidity. Similarly,
excess liquidity is undesirable as it may bring down the rate of profitability. A fair balance
between liquidity and profitability is desirable as it offers many benefits

(5) Good Public Image:

This principle of business finance suggests that a business enterprise should try to create
favorable public image through its objectives and operations. A company should remain
attractive for its employees, shareholders, customers and the society at large. For this, it
should offer various incentives to its employees, attractive dividend to its shareholders,
regular supply of quality goods at fair prices to its consumers and offer financial support to
local community and the society at large by providing funds for social purposes such as
education, public health, cleanliness and pollution control and provision of educational and
sports facilities to local people. Business enterprises are expected to function efficiently,
earn adequate surplus (profit) through fair means and use a part of surplus for social good
or social welfare.

Conclusion

Financial management of business is the heart of any business. It's what drives your
business forward to meet its vision. Proper management of business finance by following
the above-mentioned principles helps to prioritize goals of the business, frame policies,
maximise returns expenses, and in cutting down unnecessary costs.

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