Truthfully, managing a small business can be pretty exciting. Entrepreneurs enjoy this hustling environment – from overseeing marketing campaigns to conducting team meetings and more. However, there’s one task that everyone dreads: finances.
Many business owners don’t find finance amusing, whereas others can’t find their way around numbers. Regardless, businesses are all about money, and how you manage it determines the company’s success. After all, finance is the core of every business today. Whether developing a new product or installing machinery, you need money to keep operations running.
While everyone talks about money and effective financial management, hardly anyone can understand why? As finance is the fuel of business today, you have to be super careful when handling money. Sometimes, entrepreneurs spend a lot which lands the entire company into losses. Likewise, there have been instances where organizations had to borrow because of insufficient cash.
In simple words, financial management helps the organization determine where and when to spend. If you want to learn more about this, have a look below. Here we are highlighting what business finance is and why it is important.
What is Business Finance?
Simply put, business finance is the art of managing your company’s money. You have to ensure that the business has enough funds to run day-to-day operations. Similarly, you have to secure long-term investments and earn returns to expand the income stream. However, managing business finances isn’t everyone’s cup of tea. So you have to hire a team of accounting and finance experts or learn the ropes yourself. For that, you can look for short courses or higher degree programs.
If you don’t think you can manage the load or restrictions of a traditional degree, consider pursuing an online degree in accounting or finance to understand business finance. eLearning programs will give you the flexibility to learn while running the company. In addition, it will help you develop skills and strategies that can be beneficial for your business in the long run. Further, there are several areas of business finance which you have to be familiar with like:
The way business finance functions depend on management accounting. These documents outline the organization’s costing and financing strategies, giving an overview of financial performance. Therefore, you have to look at the profit and loss statement, balance sheet, and cash flow statement.
The profit and loss report unfolds how much your company has earned. It also shows whether your organization can handle new expenses such as interest on loans or taxes. All in all, you can get a clear picture of how much money the business is making.
Similarly, the balance sheet provides data on how much you own and owe. It gives a snapshot of assets (money available in the business) and liabilities (payables).
Lastly, the cash flow statement shows money coming into and going out of the business. However, it is speculative, and business owners use it to predict whether they have sufficient cash available.
The Role of Depreciation
Another crucial concept of business finance is depreciation. It allows owners to spread the cost of assets over their useful life, reducing the financial burden on business. Let us explain this through an example. When you make a substantial investment; perhaps, purchase a machine, you can divide its cost over its life. If you plan to use it for five years, you can divide the expense by five years and make yearly payments.
Deducting a percentage of cost every subsequent year ensures your profits aren’t drained. Likewise, it also ensures you have cash available in the business to run day-to-day operations. Besides this, charging depreciation allows companies to reduce their taxable income, thereby decreasing the overall tax expense.
Business Finance & Retained Earnings
Mostly, ‘finance’ is all about managing money, but a part of it is also about securing capital. In some instances, businesses don’t have sufficient funds to stay afloat. Here, the role of business finance evolves to securing capital through external sources. Depending on the company’s position, you can opt for equity or debt financing.
Perhaps, you can sell your shares in the open market or get a bank loan. However, this requires careful and comprehensive analysis. After all, you have to ensure the company can fulfill its obligations without hefty fines or liquidity crunches.
Importance of Business Finance
As businesses run on money, business finance guides organizations to make prudent decisions regarding cash flows, funding, etc. In addition, business finance lays a pathway for taking risks and expanding the business in a new direction.
At times, organizations generate profits, yet they don’t have cash available. Business finance recognizes such issues upfront and manages cash flow. It ensures enough money is coming into the business by redefining payment terms.
Similarly, it manages excess cash flow by putting funds to good use. Most finance managers invest in short-term financial securities and earn premiums on maturity, whereas others buy inventory. In any case, they make sure the cash isn’t lying idle and earn massive returns on it.
When seeking funds from an external source, every business owner becomes skeptical. Business finance strategizes funding decisions through several techniques. First, it allows managers to conduct a cost-benefit analysis, identifying the returns of financing decisions. It will help you understand whether acquiring funds from an external source would bring business or not.
Second, business finance helps entrepreneurs explore their options. If your business cannot pay interest payments, you can explore crowdfunding forums. Having a financial strategy in place will allow you to reach out to venture capitalists without making any extra effort.
Managing Inevitable Risks
Most entrepreneurs have a habit of putting money into risky investments. Even though returns are high, they don’t have the appetite to bear the risk. Fortunately, business finance can define the company’s risk tolerance level. It unfolds the number of losses the business can bear and how much risk is acceptable, saving the risk of losses. In turn, business owners can find viable and risk-averse investment options that align with their risk appetite.
Undeniably, finance is one of the core functions that fuel a business. From collecting funds to allocating them, business owners should be aware of all financial undertakings. Similarly, you have to understand the different aspects of business finance and work your way around them. For that, you have to learn the ropes, hire professionals, and understand the importance of business finance.
Published February 17th, 2022