new business finance

new business finance

The Importance of Financial Management in New Business Ventures

1. Introduction to Financial Management in New Business Ventures

New business ventures, on the other hand, have an uncertain future and their track record of future performance is unknown. Since new business ventures are usually capitalized through equity and borrowed capital, it requires a high level of judgment and risk-taking ability to finance them. These research works on the importance of financial management in new business ventures are therefore worth a close examination.

It is clear that finance is the lifeblood of all organizations. Without finance at their disposal, they cannot survive for long. A directly proportional relationship exists between finance and the survival of organizations. While large corporations have a track record of revisiting the capital markets for fresh financial resources, new business ventures are constantly faced with financial problems. Large corporations are able to borrow because they have substantial assets and a track record of performance and possess the capacity to repay the loans.

2. Key Financial Concepts for New Entrepreneurs

Every business decision, regardless of the size or type of business, involves an element of risk. The greater the risk, the greater the expected return. Some of the important things new entrepreneurs need to know to make good investment decisions involve financial markets and the securities that trade in these markets. The financial markets are the meeting place for people with surplus funds to invest and for others who want to borrow funds to purchase assets. The returns earned from securities transactions are not guaranteed and do vary depending on many factors that can change over time. The concept of the time value of money is important because the dollar relationship assumes that dollars that are spent or received at the present time are different from dollars that are spent or received at some later point in time.

Entrepreneurs who are about to start or already started a new business should have a basic understanding of the financial concepts that lead to good business decisions. Some of the key financial concepts that new entrepreneurs should consider include the time value of money, risk and return, and securities markets. The time value of money concept is important because business profitability occurs over time, and good business decisions require comparing dollars that occur at different points in time.

3. Financial Planning and Budgeting for Startups

The budgeting process involves setting financial goals for the business. You must determine beforehand, as accurately as possible, just how much money will be needed; then these needs must be compiled. The proposed sources of money must be equal to the projected needs of the business. The sources can be funds of the owners, borrowing from a bank or relatives, and earning that money by operations of the business. These steps must be followed by periodic reviews of the budget to measure financial progress and performance over time. Small business benefits greatly from the periodic review of a plan as a control technique. By making a comparison of planned results with actual results, the owners can determine that corrective measures are needed. The classic planning process outlines budget planning in the following sequence: Statement of objectives, Market analysis and criteria, Resource needs and operations plan, Financial planning, and cash control.

The secret of a financially successful business can be found in its planning. Poor budgeting is one of the most persistent and overlooked problems associated with new business ventures. Many people think budgets are something only for large businesses, but a budget is as necessary for a small business venture as for a large corporation. Just as people consult maps when they start on a journey, so must they have some guide or plan to know where they are going. A budget provides the guide or plan for any proposed income and expense over a definite period of time.

4. Securing Funding and Managing Cash Flow

In obtaining a loan, you will have to prove that you have a sound business idea, that you are creditworthy, and that your business will be able to repay the loan in a timely manner. You will need to establish a good relationship with a commercial lender such as a bank, and you may be required to obtain a personal loan guarantee. A relationship with a commercial lender can prove to be an asset in the future. When you approach a business lender, take your time to develop a complete loan request package. Banks exist to lend money, but luring money out of a bank is not easy, and borrowing money under the best of circumstances is time-consuming and difficult. Banks, as a rule, shun risk, preferring to lend on the strength of good security at a fair rate of interest. Plan on marshaling strong reasons for making your request and presenting a sound character and trustworthiness for aid.

The revenue and expense pro forma you developed for your business plan should help you determine how much money you will need to get your operation off the ground and to cover operating expenses and obligations during the all-important first year. One of the most critical issues a new business faces is not having enough cash to meet its obligations. In fact, cash flow may be the single most important financial forecast you will prepare. A detailed study of the timing and amounts of operating cash requirements should tell you when you will need funds and how much. You should secure enough funding for unforeseen problems, and most likely you will need to use your personal resources to back up any loans you ask for. Both the justice and the business climates of the 1990s promise tougher loan requirements.

5. Financial Reporting and Analysis for New Businesses

Full disclosure on a timely basis benefits both the enterprise and its equity security holders. Employee-stock option programs are widely used to motivate, recruit and reward talented employees. The adequacy of financial information is an important issue for them. Full disclosure benefits the general investing public as well. More importantly, an increase in the number of high-quality financial reports benefits the nation as a whole. Therefore, increasing demands are being made to reform financial accounting and reporting. The fight to reform the regulatory process is waged on many fronts. Ultimately, the acknowledgment is that financial statements are representations of the past. They are not and cannot be perfect projections of future operations. Even with the bountiful use of management’s discussion and analysis, the forecast results are decidedly imprecise and subject to wide multiplicity of possible outcomes. However, through the use of flexible GAAP, it is argued that limited real world financial information can be maximized. Financial statement reform can happen. Flexible GAAP, it is argued that limited real world financial information can be maximized. Financial statement reform can happen.

An effective reporting system can allow a relatively small new business venture to confidently raise large amounts of capital. Knowledgeable, informed and timely reports allow the new business’s owner-managers to operate their enterprises effectively and efficiently. They thus have no fear of the IPO process. In fact, standardized filings with the Securities and Exchange Commission are widely feared at both the pre-filing and post-filing stages. At the initial stage, they may present apprehensions concerning time and expenses associated with compliance, and at the post-filing stage, they may relate to the business and its competitors. These standardized filings for the new business often publicize proprietary information to competitors. Even general airing is likely to aid competition. Consequently, private equity sources are often preferred. The venture process is complex, often requiring informal investor participation. It can be expensive and time consuming and can often involve high financial and emotional costs. In an age of financial globalization, there is need for efficient and centralized information disclosure. Inadequate, untimely, false or misleading information can cause costly market or legal retribution.