Two Main Types Of Business Finance
There are basically two types of business finance which every business requires to be able to run and operate its operations and this is what we’ll be looking at today.
I initially wanted to come up with an introductory post on Business Finance but after sensing that there’s nothing much to say about it (i.e. its description), I instead decided to include the definition of business finance in this post.
We’ll therefore start with the definition of Business Finance then proceed
to look at the two main types of business finance.
Types Of Business Finance: What Is Business Finance?
Business finance simply refers to the money that is required to start and run a business. It also involves figuring out where to get the money.
As you can see from the above definition of business finance, there’s really not much to say concerning it. Had I come up with a post about it, it would have probably been 100 or less words long.
Let’s now proceed to look at what the two main types of business finance are.
Types Of Business Finance #1: Fixed Capital
Fixed capital is described by Investopedia as:
Assets or capital investments that are needed to start up and conduct business, even at a minimal stage. These assets are considered fixed in that they are not used up in the actual production of a good or service but have a reusable value. Fixed-capital investments are typically depreciated on the company’s accounting statements over a long period of time, up to 20 years or more.
Examples include; factories, office buildings, computer servers, insurance policies, legal contracts and manufacturing equipment–anything that is not continually purchased in the course of production of a good or service
In simpler words, fixed capital is used for the purchase of fixed assets.
Types Of Business Finance #2: Working Capital
Working capital is described by Investopedia as:
A measure of a company’s efficiency as well as its short-term financial health. The working capital ratio is calculated as:
Working Capital=Current Assets-Current Liabilities
This ratio indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.
Also known as “net working capital” or the “working capital ratio”.
In simpler words, working capital is capital needed to support the normal short term operations of a business i.e. its day to day operations.
I hope the above two main types of business finance are now clear.
My Take On The Above Two Main Types Of Business Finance
The above types of business finance are the main types of business finance in that without them, a business cannot be able run its daily operations leave alone meet its short term goals or obligations.
Every entrepreneur therefore needs to ensure that they’ve got ready access to working and fixed capital to ensure that their businesses never stagnate or worse, go under. Lacking any one of the above two main types of business finance can be disastrous for your business.
I know there’s another angle to the types of business finance i.e. the types of financing for business, which includes things such as personal savings, donations from family and friends, retained profits etc. (we shall look at them later) so let me take this chance to once again clear things up and say that the above 2 types of business finance are the main ones in the sense that a business can’t survive without them-It needs working capital to run its day to day operations and fixed capital to facilitate the purchase of fixed assets.
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