business finance definition

business finance definition

Understanding Business Finance: A Comprehensive Guide

1. Introduction to Business Finance

Enterprises with a good business orientation understand perfectly the product and markets they are involved in. They are focused on creating the greatest consumer satisfaction and trying to reduce their production costs. However, for most companies, obtaining the necessary funds to start and develop the business will raise numerous issues and often even a lot of dilemmas. Although the attractiveness of the business project and the quality of the management are important for businessmen, the method to obtain the funds does not depend entirely on them. The financing method depends on the type of activity and on the links between the company and the environment it is in – both macro (economic, fiscal, and legislative) and micro (financing and business development).

Business finance can be a significant concern for the success of a company. Any type and size of business, whether it is new or old, needs business finance. As no business exists or grows without adequate money, a large section of financial literature deals with the sources, uses, and limitations of business finance. Enterprises need a wide variety of finance and investment solutions, from short-term trade finance to long-term complex investment funding. Investors who have worked in one area of finance in the past may be unfamiliar with the financing landscape in Asia, and particularly in other countries in the region. It is not enough to know whether you need a loan or an issue of shares, you must also understand that there are different terms and specific conditions associated with each type of financing. Business finance can be a significant concern for the success of a company.

2. Key Concepts and Principles of Business Finance

Any and every type of business benefits from efficient business finance procedures. These set of procedures optimize cash management and resource allocation, at minimum cost and little risk. Efficient business finance procedures make sure that optimal business value is achieved. It encompasses identification, prioritization, and handling of financial matters. Companies, their suppliers, business-to-business marketplaces, and other transactional networks deal with these financial issues in a variety of ways and to different extents. All business finance procedures create, spend, and track money. It doesn’t matter how big the company is, how many products it sells, what its mission is, or where it is located.

Cash flows are at the core of business operations. Every business transacts in goods and services, producing and selling them. All such transactions result in inflows and outflows of cash. The goal of business finance is to ensure safekeeping and efficient use of financial resources. To this end, one has to project and analyze these cash flows. Over time, cash flows and their timing are discounted to reflect their relative price. Importantly, there should be some residual cash left to share among investors. At the end of the day, the amount of business value is captured by the entity that owns artifacts and knowledge about the business. Money from cash flows is then attributed to the owner. By definition, creditors are repaid first, then equity investors.

3. Financial Statements and Analysis

3.4 Financial Analysis Financial analysis is defined as the process of examining the relationship between various components of the financial statements. An analysis of the financial statements of a company frequently generates questions about all three basic definitions of liquidity, activity, and leverage. The analysts’ tools that help generate such questions include the following: Ratio analysis Rate of change diagrams Common size statements Cash flow analysis Internal firm analysis

3.3 The Statement of Cash Flows The third of the major financial reports is the statement of cash flows. Many analysts and business people regard it as the most important. The statement of cash flows presents the sources and uses of cash for a business during a specified period. Cash flows result from activities that are: operating, investing, and financing. The first part of the statement of cash flows reports operations and because cash from operations and cash for operations are so influential, that part is often referred to as the “opinion section.”

3.2 The Balance Sheet The balance sheet is a summary statement of the financial position of a business on a given date. The balance sheet is important because it shows the financial position of a business on that date. The equation that illustrates the financial position of a business is: Assets = Liabilities + Owners’ equity. The balance sheet introduces the company at a certain age on a certain date. It is a type of “snapshots” of the company, revealing what the company possesses and owes at that particular moment.

3.1 The Income Statement The income statement is a report of a firm’s operation over a period of time. It is a summary of expenses and income and various subtotals. The income statement is important because it shows an analyst the results of a type of plan that the business has carried out over a period of time. It starts with the sales at the top, represents various types of expenses, and results in the net income at the bottom. The totals for sales, expenses, and net income consist of subtotals that show important information about primary revenue-generating operations.

The three major financial statements are of paramount importance to a financial analyst and other managers and employees of a business. They are the income statement, the balance sheet, and the statement of cash flows.

4. Sources of Business Finance

The business owner should consider the company’s needs and stand goals before making the final decision of their choice of financiers. This implies that a business owner should identify the likely sources of funds available to the business and the types of security they are likely to ask for. In summary, this chapter covers the key sources of finance available to companies and some of the factors that companies should consider before approaching lenders. It also describes the various methods of getting money to the business in the form of debt, savings, and other sources— much of which management may not be fully aware of.

The effective and efficient running of a business enterprise calls for the use of finance. Even though income from trading is the major source of finance for the business, it is often necessary for the company to use other forms of finance to ensure its effective operations. Part of the profits generated is often kept in the business to help it grow and some are usually given to the company owners, but in some cases they are used to obtain additional capital. Alternatively, a company can obtain additional finance from advertising and the sale of futures issues. Another common form of obtaining finance is the renting of an asset to a financial service or to use the company’s property and real estate to the utmost. Other sources include financing through other companies, up to the international level.

5. Strategies for Effective Financial Management

Make smart product and service delivery decisions. In some cases, it might make sense to request a deposit when taking a large order. Also, find out if a client is a slow pay. When screening clients, a credit check on the back-end of your sales process can save a lot of time and money.

Having a solid business credit history makes it easier to obtain loans in the name of your business. It also allows your small business to establish supplier accounts that may offer credit terms. Should you need to pay a supplier at a later date, especially for an extended period of time, a healthy business credit history will be important to acquire additional credit from a bank or a supplier.

Address any business-related credit issues. Your business has its own credit record. This covers its purchases, payments, and debts. Check your company’s credit reports at least once per year. Make sure that they are accurate. Correct any errors.

Understand the different types of business credit cards. Some offer cash back and other rewards. Also, the interest that you pay on your business card charges may be tax deductible. When you use your card, you might discover that there are additional benefits, like travel insurance, rental car coverage, and extended warranty protection.

Seek a business credit card. Using a credit card for business expenses will further clarify the lines between business and personal spending. The statements that you receive for these cards will clearly identify your company’s purchases, such as equipment, computers, and travel. In addition, if you ever find yourself needing to establish a line of credit, banks and other lenders prefer dealing with companies that use business credit cards.

This simplifies the tracking of business-related expenses, sales, and purchases. It also reinforces the distinction between what you earn for your own ends and what your business needs to survive. Paying yourself a salary out of your business will also simplify the payment of your taxes.

Separating business costs from your personal expenses. Set up a checking account specifically for your business. Pay the costs associated with your business from this account. This includes payments for supplies, rent, utilities, inventory, phones, internet access, and taxes. It also means depositing sales proceeds into this account and paying yourself a salary from the proceeds of those sales.

There are several strategies that will help you to effectively manage your small business’ finances. These include:

Make sure your business gets off to a good start by establishing a solid financial foundation. Get the help and advice of financial and accounting professionals to help you become and stay profitable.