The management of finances is a core responsibility for every company. There is much more to it than just making sure that your business has enough money coming in to pay its bills. Financial management also involves the careful development of a strategy that will increase profits while at the same time minimizing the chance of financial loss or bankruptcy. There is an art to all this and it is not something you can master overnight.
Small business finance, simply put, is the managing and raising of capital by business companies. Finance, planning, analysis, control, and financial operations are all tasks of the finance manager, who is often very close to the helm of a company’s organizational structure. While there are several other aspects of small business finance that must be addressed, these are the most important. The other areas of concern will likely be found in individual reports that your CPA provides on a yearly basis to the board of directors.
In order to effectively manage capital, you must have a well-developed financial plan that will address both short-term and long-term goals. Short-term goals include increasing profits, reducing expenses, expanding customer bases, increasing shareholder equity, increasing working capital, reducing debt, and using the capital to address growth opportunities. Long-term goals are similar to the above but instead of focusing on profit in the short term, they focus on building the organization’s capital structure over the long term.
A firm’s financial health is closely tied to its level of debt. Managing debt efficiently is a key component to the management of profits and market share. One way to manage debt is through the use of corporate debt and venture capital investments. Venture capital investments include angel investors, venture capitalists, mortgage bankers, financial institutions such as banks and brokers, and/or other forms of private funding.
Capital is important for the functioning of a business, which is why most business owners work with a finance advisor. These finance advisors analyze the business’s financial situation, determine its needs, and recommend the most effective routes to achieve those needs. To be an efficient finance advisor, one must be very aware of all aspects of business finance including pricing, risk management, income, valuation, and financial ratios. Finance advisors can be found in all areas of business life including: manufacturing, sales, marketing, and finance. Finance also includes a wide variety of investment products including derivatives, foreign exchange, venture capital, insurance, and more.
Business finance includes three major areas: personal finance, business finance, and business operations finance. Personal finance relates to how a company spends its money; business finance refers to how a company uses its capital assets. In addition to capital requirements, business operations finance addresses many other issues such as information systems, human resources, manufacturing, sales, marketing, etc. All three areas require different methods of financing depending upon the type of business being served.
The third area of business finance concerns the creation and allocation of working capital. The term “working capital” encompasses funds needed to run the day-to-day operations of a business. Typically, small businesses obtain short-term loans from family or friends for immediate use. However, if these loans are not repaid promptly, some banks and other lending institutions may turn the business owner’s deposits into working capital. For working capital management, small business owners will typically work with their finance advisor to develop a short-term cash flow plan that will cover necessary expenses while at the same time providing enough cash flow to cover short-term cash needs.
Small business finance formulas will vary according to the type of business being served. The goal of any financial advisor will always be to assist a client in achieving their financial goals. Therefore, the formula used by the advisor must be based upon the type of business being served and the goals that are being sought to be achieved. In addition, the formula should be based upon sound quantitative and qualitative analysis methods that maximize the effectiveness of its applications.