Regarding business, finance is a very big and important topic. But what does it even mean? What is finance in business? If you have this question, then you are in the right place. This post will explain what finance is and discuss some essential subtopics under finance in business.
Finance is quite broad and complex topic in business.
It can become overwhelming for any business person yet to study it.
Luckily, this article will break down everything to make it easier for you to grasp.
While the article will cover the basics of finance in business, it will be a firm foundation for additional studying.
At the end of this article, you should have basic knowledge of money management tips that will help you better coordinate your business financing activities and reduce your financial risks.
Meaning of Finance in Business – What is Finance in Business
Finance or business finance refers to how a business manages its monetary resources and activities.
Particularly, forecasting, saving, budgeting, lending, investing, borrowing, etc., are some of the activities related to finance.
A lot of people think of finances and feel it is all about money.
While it may look or sound correct, money is only an aspect of finance.
Further, money is simply the legal tender through which businesses carry out their financial transactions.
Finance covers everything from monetary resources management to the allocation of assets and so much more.
It cuts across several departments and activities.
Having gained this knowledge, we will be moving on to discuss some important aspects of your business finance that you should know.
Important Concepts in Business Finance
1. Cash flow
Cash flow is an important concept in business finance. This the money that goes in and comes out of a business within a particular period.
Money comes into a business as income from clients and customers that patronize the business.
Similarly, it goes out of the business as expenditure or expenses.
Expenditures are a normal aspect of every business.
A business’s expenditure can be anything from rent to wages, salaries, raw materials purchase, transportation fees, maintenance, payment for supplies, and so much more.
Cash flow can either be positive or negative.
A positive cash flow is great, while a negative one is not good.
Let’s look at each individually to help you understand them better.
Positive Cash flow
A company has a positive cash flow if its income exceeds its expenditure.
That is, the money that comes into the business is more than what goes out of it.
A positive cash flow is vital to keeping a business up and running.
This is because when a company has a positive cash flow, it is capable of paying its bill once they are due.
It will also be able to handle unexpected costs.
So, regardless of what happens, the business’s operations will continue smoothly.
Negative Cash flow
Negative cash flow, on the other hand, is when a business does not make as much as it spends.
Sometimes, your business can have a negative cash flow, which is normal and manageable.
For instance, if a company needs to buy new equipment or has to pay for a new location, it may have more expenditure than income.
There’d only be an issue if a company experienced negative cash flow for an extended period.
But if the business experiences negative cash flow for a planned and expected period and recovers at the end of the expected period, it would not cause a big issue for the business.
Why Cashflow is Important
When it comes to your business finance, your cash flow determines a lot.
If you do not handle your business finance properly, your business may fall into a prolonged or unplanned negative cash flow position.
If this happens, the chances of your business failing will significantly increase.
No matter how business savvy you are, you cannot run a business without cash.
This is why cashflow is very important in business.
Every business owner should carefully track and manage their cash flow to ensure their business finance does not suffer.
You can track your cash flow over a particular period, like monthly, quarterly, or yearly.
Tips on Managing Your Business Cash flow – What is Finance in Business
The following tips will help you manage your business cash flow so that your business runs smoothly.
Make a Cash flow Statement
Keeping track of your cash flow is much easier with a cash flow statement.
So, you should create one, as this would allow you properly monitor the money that goes in and comes out of your business.
A cash flow statement will help you understand and predict your monthly cash flow.
The good thing is a good accounting app should have this document as part of its standard reports.
But if your accounting app does not offer this feature, you can easily create the document yourself.
A little research on the internet will help you learn everything you need to create a great cash flow statement, even though you don’t have any accounting experience.
Carefully Choose Those Your Company Does Business With
Depending on the nature of your business, you would have to do business with other businesses from time to time.
You may need to work with a supplier, manufacturer, wholesaler, etc.
Even if you do not have to do business with other businesses, you would have clients and customers that your business caters to.
Regardless of the situation, you should learn to be very selective of those you choose to do business with.
Do not let a juicy offer from a prospective client or another business make you jump on scam deals.
Before going into business with anyone, ensure you take your time to vet that person or business properly.
You may not be able to do this for all clients, but you should do so for key clients.
You can do this for a client looking to make a huge purchase on credit.
Imagine what would happen to your cash flow after completing a client’s offer and then they refused to make payment for it.
Or if you order raw materials from a supplier, they suddenly become unavailable after you make payment.
So, make sure you find out all you can about key people you decide to do business with.
In the case of individuals, it may be difficult to learn their credit activities.
But you should still put in the effort to learn about them.
Luckily, it is easier to learn about another company’s credit activities; you can easily check them out on credit agencies.
Reconsider Payment Terms
If you run a business that offers credit and payment terms, then you should rethink these payment terms.
If you have a short payment term of 7 to 14 days, you can properly manage your cash flow to finance your business during this period.
But if you have a prolonged payment term, it may directly impact your cash flow.
Yes, you would attract more clients with this juicy payment plan.
However, should it be at risk of going bankrupt?
For example, let’s say your business offers clients a payment term of about 60 days.
How do you intend to finance your business during this period?
Assuming more than 3 clients take this offer at the same time.
You would spend money delivering to these clients, and you won’t get anything back until 60 days later.
So, consider reducing your payment terms if you have a long term.
Also, you should put systems in place that would discourage late payment.
You could add an interest rate on late payments.
Or you could offer discounts to clients that pay on or before time.
2. Financial Forecasting and Planning
Proper planning and forecasting will help you do things the right way when managing your business finance.
Every business needs 4 important financial forecasting and planning documents to manage and allocate its financial resources properly.
Tracking your business finance with these documents will also ensure you are ahead of your financial situation.
You can easily notice potential financial issues.
This would make it easier to avoid these issues or devise a great plan to help you tackle them.
You’d also make better and well-informed financial decisions by forecasting and planning your finances.
That said, let’s discuss the 4 crucial financial forecasting and planning documents every business needs.
This document is essential for managing a company’s finance because it gives a summary of the company’s financial standing.
It comprises 3 parts; assets, liabilities, and equity.
The company owns assets such as buildings, machinery, vehicles, and so on.
Liabilities are money the company owes, such as debts, bank loans, and so on.
And finally, equity is the amount the business owner(s) have invested into the business.
You can easily calculate your company’s net worth using these 3 financial components.
Cash flow Statement
The cash flow statement has already been discussed.
But let’s give a rundown of it once again.
This document is vital for managing your company’s financial resources because it summarizes how money comes in and goes out of your business.
It will help you maintain a healthy cash flow so that your business will have enough cash to stay operational.
Profit and Loss Statement – What is Finance in Business
This document summarizes your business’s yearly expenses and revenues.
You can use this document to calculate your business’s yearly loss or net profit.
If done accurately, this document will help you measure your business’s profitability.
And more importantly, it will help you determine how much revenue your company has to earn to cover all its expenses (the breakeven point).
You can also create a profit and loss projection.
This is one way to forecast your business finance.
You should consider creating 3 of these documents.
One should project the worst case, another the best case, and the last the most likely case.
This way, you can project where your company will be in the future.
You can then make financial plans based on your projections.
For example, if you project that your business will have a lot of profits soon, you can start making expansion plans or getting new equipment.
Likewise, if you project reduced profit levels, you should consider some cost-cutting strategies.
This also will also indicate that this is not the best time to take on more financial activities.
Breakeven Analysis – What is Finance in Business
This document will help you determine the products you sell or the revenue your company has to bring in for it to cover its costs.
During the initial stage of your business, you may not make profits.
This is normal at this stage.
But if your business is still unable to break even (that is, generate enough revenue to cover costs), it may mean your business isn’t financially viable.
The break even analysis will help you determine this.
It will also help you determine if you need to reconsider your prices with your breakdown analysis.
Your prices may be low, and you need to increase them to break even.
Or your expenses are high, and you can cut down on certain processes to reduce costs.
You can also use this document to evaluate a new project or potential expansion.
3. Business Debt – What is Finance in Business
When financing a business, some business owners tend to opt for debt financing instead of equity financing.
Debt financing involves borrowing money to fund a business and then repaying the money with interest.
Equity financing, on the other hand, involves getting money to fund a business from an investor who would then take equity (a percentage of the business) in exchange for the funds.
While both financing forms have pros and cons, some people prefer debt financing.
Undoubtedly, debts help kick start a business and keep it running.
However, it can be the end of a business if the business owner leaves it to spiral beyond control.
Managing your business debt is key to ensuring better management of your business’s financial resources.
Below are some sure tips to help you manage business debts effectively.
Have Funds for Rainy Days
You cannot plan for all unexpected situations that may come up in your business.
But it’s a good idea to have funds for rainy days.
So, every month’s end, make it a habit to add some money to your business savings fund,
Also, ensure you always have a particular amount of money in your business savings account.
This way, you won’t have to rely on your business credit card or overdraft whenever an unexpected expenditure arises.
When more money comes into your business, you will have a positive cash flow, making it easier to settle debts and reduce the need to get more loans.
Reduce Unnecessary Expenditure
If you are beginning to struggle with your business debts, consider cutting off some costs so you can properly manage your debts.
Cut down costs that wouldn’t affect the smooth running of your business.
For instance, instead of hiring a meeting room to meet with your clients, you can simply meet with them, say a coffee shop.
Once your debt is under control, you can return to your old spending habits.
Increase Your Credit Score – What is Finance in Business
You would need to get loans for your business from time to time.
Your best bet at handling these loans is to ensure they do not have a high-interest rate that will make them difficult to handle.
A good credit score will help you get the best loan deals with lower interest rates.
Therefore, you need to make sure you keep a great credit score.
Get Funds to Pay Back Your Debts – What is Finance in Business
Raising funds to pay debts isn’t easy for a business owner.
A lot of investors would not want to invest in a business that is struggling with debts.
However, there are other ways to get funds to pay back your debts.
You can borrow from your friends and family or sell some of your company’s assets.
4. Accounting – What is Finance in Business
Accounting is another integral part of business finance and this aspect is quite broad.
So many accounting tasks are impossible to carry out without proper accounting knowledge.
So, the best bet for any business owner to keep a proper account of their business finance is to hire an accountant.
You can handle your accounting needs all by yourself at the early stages of your business.
But as your business grows, you need a professional accountant.
If your business is budding and you can still handle your accounting, consider investing in accounting software.
This will make the tasks a whole lot easier for you.
Finally, you should keep your personal account and your business account separate.
Even though you run a small business that does not require you to operate as a separate entity, you should keep your business and personal finances different.
Doing this will save you a truckload of stress further down the road.
It will also make it easier for you to manage your personal and business finances properly.
Conclusion on What is Finance in Business
Business finance refers to the management of a company’s financial resources.
It is how a company allocates its finances and handles its financial activities.
This broad topic can be confusing for someone new to it.
But this article has discussed some of the basic subtopics under it to make sure you have a clearer understanding of this business subject.