It doesn’t matter whether you’re a large corporation or a sole proprietor working from home, business finance is an integral part of any enterprise. Without it, there would be no chance to put money aside to meet expenses, to grow, or to expand. Unfortunately, business owners often make the mistake of thinking that they can handle all aspects of business finances on their own. While this is possible, it’s not realistic, especially when you consider that knowledge and skills alone are insufficient.
Business finance is extremely important because it determines both the success and growth of your business. In simple terms, it’s what determines the capital requirement of your business. Essentially, business finance is responsible for generating a financial estimate of the funds you will need to operate your business, as well as the funding required to pay creditors, for example. Most businesses use short-term funds to avoid taxes and to meet short-term obligations. Long-term capital needs come from long-term debt and equity.
Financial management also involves the process of forecasting, which evaluates future cash flows using historically accurate data. A good manager should be able to provide a range of acceptable inputs for a given target date. This includes both sales and investment forecasts, as well as a current and long-term rate of interest. The technique used to perform a forecast involves calculating the average values of all of the factors that are significant to your business. One way to create a cost-benefit analysis is to determine the effect of increasing capital (investment) costs against the increase in sales or profits.
Some of the steps involved in business finance are more important than the actual techniques used in financing. Two categories are included in the spectrum of short-term financial operations. One category is “selling finance”. This category includes fundraising, purchasing, disposing of property, accounts payable, inventory, and capital equipment.
Another category is “buying finance”. This category includes funding for the purchase of tangible assets, such as land, buildings, machinery, furniture, and supplies. All activities in this category must be related to business finance. It is also necessary to determine if you are increasing your capital base with loans or by investing in your business. Many companies mistakenly believe that financing is simply paying interest on existing assets, when in reality capital financing is a method of raising funds. Other examples of financing include operating leases and leasing capital.
There are two basic types of capital funds available in business finance: short term and long term. The most commonly used short term finance funds are line of credit and overdrafts. Long term capital funds are usually in the form of retained earnings and accounts receivable. The most complex method of business finance involves raising funds that will last for a long term period of time, for example through a purchase of stock or common stock.
Most banks offer financial products to businesses seeking to obtain needed funds. These include checking accounts, savings accounts, and business loans. A financial manager is typically involved in a company’s decision making process. He or she is responsible for analyzing the company’s financial data in order to determine how much money it needs. The financial manager will then create a proposal for raising funds, which will include a business plan describing how the funds will be used and a timetable for repayment. Once the financial manager determines whether a loan will be a better option than a check, he or she will assist the business with applying for the loan.
Working Capital Requirements: All countries have different requirements when it comes to working capital requirements. India is no different. However, most Indian banks provide business borrowers with reasonable terms on their loans and relatively low costs on interest. For example, most Indian banks require business owners to repay only about thirty percent of their gross business profits on each borrowing, compared to about fifty to seventy percent for most European and American banking systems. Many banks also provide additional working capital assistance, including the ability to take loans against existing balances. This is an excellent way for a small business to increase its liquidity.