What is Involved in Business Finance?

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Written by Andrew Collins

Business finances are an unavoidable part of any organization’s success. They represent the difference between what the company invests in assets and what they have to pay out as liabilities. Finance is a broad term used to describe a range of matters regarding investments, the generation of income from assets, and the control of monies. The word “finance” comes from the Latin word meaning “action for gaining money”. In its modern sense, finance includes the whole range of activities that lead to the movement of money. It may be viewed as the science of working out the most economical method of producing a return on investment (ROI).

The key to effective business finances is proper financial planning. Planning is essential for all businesses large or small; it is equally important for all individuals as well. Proper financial planning is basically a tool for working capital management. Proper working capital requirement determines the size and variety of assets available for funding and the timing of cash management operations.

Financial statements provide the information needed by the managers of a business to plan their finances. The key to effective business finance management is a regular monitoring of cash flow and financial statements. Some of the measures included in an organization’s financial statements are:

A company’s cash flow represents its assets-to-liabilities relation. Cash flow problems often result in over-all profit losses because not enough money is spent to cover the costs of production. An accurate description of a company’s net income can be determined by adding the net income of each process through its sale to its expenses, and then multiplying this by the number of sales. Another way to look at the meaning of net income is to add the net income to the net profits. The difference between the net income statement and the statement of profits is the difference between net income and net profit.

Another aspect of business finances involves the evaluation of cash needs. Most of the financial statements have a cash flow forecast, which forecasts the cash that will be spent in operations for a period of one year to five years. This is called the operating financing section. The other aspects of business finances include: short term finance, which includes: short-term bank borrowings, working capital, inventories, purchases, sales, and expenses; medium term finance, which include: advances, discount rates, and trade debt and credit outstanding; long term finance, which includes: accounts payable, accrued expenses, current loans and lease payments. There is also a section called investment management that involves issues related to investment strategy, investment fund management, risk management, and merger and acquisition strategy.

As most businesses have a complex accounting system, the information gathered by the accountant and the business finances department are crucial for making informed decisions regarding investments, working capital, and selling or buying stocks and property. The information from the accounting department is used to decide whether the business needs to obtain credit, to increase prices, and increase employee incentives. These decisions affect cash coming in and out of the business. Therefore, business owners must consult an accountant or business finance manager whenever they are faced with changing financial situations.

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About the author

Andrew Collins

Finance and Business News Blogger and father of 3, husband, dog walker and fisherman. Love connecting with new people.

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