Understanding the essential components of business finance
Business finance is the art of studying and organizing financing so that business investments make a profit for both the lender and the borrower. Finance is also a broader term for things regarding the study, development, management, and investment of finances and assets. A businessperson who wishes to establish a new business or expand an existing business must have sound business finance knowledge in order to get the best results. It’s very important for a business to understand its options in terms of capital expenditures, working capital requirements, debt financing, and so on.
Understanding the essential components of business finance as well as the various tools and techniques used in the process is the key to sound decision making and managing capital. All finance decisions should be made based on the appropriate financial statements that provide information about total assets, liabilities, revenues, and expenses. Proper business finance management involves efficient use of the available financial resources, the timing and amount of use, the impact of borrowing and other factors, and the effect of exit and liquidity issues. In addition, management must identify the sources of non-cash financial assets. In order to assess the strength and effectiveness of their internal money management process, businesses should also have access to external business finance resources, such as bank financing, credit facilities, government loans, venture capital funds, corporate bonds, and the like.
The ability to forecast cash flow is crucial in making sure that the business is able to continue operating as usual during slow periods. To this end, managers should develop a solid understanding of cash flow, including a detailed history of cash flows, both incoming and outgoing, methods of making sure that cash flows are predictable, the role of interest rates, depreciation, and inflation, and more. They should also keep an eye on business finance management policies such as: raising equity, reducing purchases, selling assets, and so on. In addition, they should be aware of regulations related to business finance such as the FCRA, SOX, and ERISA.