Question

 Why do businesses need funds? Explain.

Answer 1

The following are the reasons why a business needs funds.

(a) Fixed capital requirements: For setting up a business, fixed assets such as building, machinery, furniture, and fixtures are required. The requirement of funds to purchase these assets is known as fixed capital requirement. The level of requirement of funds depends upon the size and nature of business.

(b) Working capital requirements: Firms require funds for financing their day-to-day operations such as the purchase of raw materials and payment of wages to workers. The requirement of funds for such operations is known as the working capital requirement.