Business finance is an integral element of running a successful enterprise. This encompasses the acquisition, use and investment of funds.
Funding requirements for various businesses vary according to their nature and size, and can be met through various sources such as revenues, investors’ own money, venture capitalists and loans from financial institutions.
Financial Statements
A financial statement is a document that summarizes your company’s finances at one particular point in time. It serves as an invaluable resource for investors, creditors and market analysts by providing key information about your firm’s assets, liabilities and equity.
Every business must prepare four essential financial statements: an income statement, cash flow statement, balance sheet and statement of owner’s equity (changes in equity). These documents provide potential investors or creditors with information which could influence their decision to lend money or provide financing to your venture.
The income statement presents revenue, expenses and net profit over a given period. The primary source of revenue is sales of products or services; however, secondary sources may include rent on business premises or interest income from investments.
The cash flow statement is an invaluable tool for tracking how much of your company’s cash goes in and out. This information can be useful when seeking new capital to invest in your business or pay off debt.
Budgets
Business finance involves a lot of decision-making based on data and budgets. These decisions can help organizations improve their profitability, extend their mission, save money, remain economically sound, and ultimately increase in value over time.
Businesses create budgets to estimate how much income they anticipate from sales of goods and services, as well as running costs associated with running the business. These expenses may include rent, mortgage/utility payments, employee salaries, internet service charges, accounting services, insurance premiums and other fixed expenses.
A company’s budget is typically composed of several departmental budgets that are combined. Larger organizations may have a master budget, which is an accumulation of these individual budgets created by management teams and used for setting business objectives.
Budgeting typically falls into three categories: static, flexible and operating. Static budgets are the initial step of budgeting and focus on fixed expenses that don’t change with production volumes or sales. They’re common in industries such as nonprofits, educational institutions and government bodies which receive fixed amounts of funding to continue operations and growth.
Cash Flow
Cash flow refers to the flow of funds within and outside a business. This includes customer purchases and payments, operating expenses, as well as investments.
Negative cash flow can pose major obstacles for businesses, preventing them from paying their bills and keeping operations running efficiently. Without sufficient funding, the business could eventually have to close down, which is one of the leading causes of small business failure.
To assess your cash flow, begin by identifying the sources of regular income. This could be direct sales (sales that come directly from customers) or collections of accounts receivable.
Next, subtract your operating expenses from total income to calculate net profit. This number will indicate whether or not you have enough cash flow to sustain your company or require external financing for capital expansion.
If your net profit is low, you may want to boost sales or raise prices. Be mindful not to drive customers away in the process.
Debt Management
Debt management can be an essential element of business finance. Small and medium-sized enterprises, in particular, must manage their debt effectively to avoid costly late payments and keep the operation running efficiently.
Debt management plans and credit counseling can both be effective ways of dealing with it, though both have advantages and drawbacks that must be considered before making a choice. Before making your decision, make sure you fully comprehend all available options available to you.
These programs typically involve creditors waiving late fees and decreasing interest rates on outstanding balances. Furthermore, they often demand that you pay off all unsecured debts within three to five years.
These 3-to-5-year plans can be a challenge to maintain due to their requirement for discipline and consistency. However, they are often the best solution for those with substantial unsecured debt like credit cards and personal loans; they could also prove beneficial for those with poor credit or who are receiving collection calls.
