A business refers to a legal entity that acquires and develops assets, delivers products or performs the operations. Definition of Business Finance The forms of finance relate to borrowing, lending, investing, forecasting, and setting-up budgets. Business finance essentially includes decisions like whether to take loan or agree to grant funds from a government agency or sell-out an ownership stake in the business to raise funds. It also covers aspects of a business’s operation such as buying or leasing materials, equipment or facilities, inventory, purchasing raw materials or labor, and marketing or advertising programs. It is the role of a business owner to make sound financial decisions to ensure the success of the business.
Business owners use a wide range of financial tools to make money and keep the business functioning smoothly. It includes the purchase of property or land, equipment, and labor, and financing buildings, equities and accounts. Finance is used by firms to obtain resources on short-term and long-term basis. Managing business finances entails making sound investment and management decisions and monitoring cash flow to avoid outflow of cash.
Cash flow is the amount of money in and out of a business. A cash flow problem arises when there is insufficient fund to conduct business on a continuous basis. To avoid such a situation, finance department helps the firm to meet its financial obligations by providing loans, lines of credit, guarantees, and other forms of financing decisions.
A business finance department prepares and implements a company’s annual budget. Budgeting is essential to determine the amount of capital needed to conduct business operations and generate profits. It is done by minimizing cost, determining potential profit, and funding growth. The purpose of preparing a budget is to ensure that operating expenses do not exceed projected revenues. In addition, a firm’s capital structure should be in place to absorb any permanent cash flow reduction.
Most business finance decisions are made on the basis of projections, which represent future earning capacity. Projected earnings will be used for financing activities and for paying debts and other expenses. A company’s financial plans are reviewed periodically to assess the strength and efficiency of cash flow management techniques and strategies. Based on the review, the budgeting process is modified if necessary to ensure adequate funding levels and to reduce costs.
As an owner or manager of a firm, you can be involved in many aspects of finance. You can directly manage the finances of the company, serving as the primary financial manager. You can also be a partner in joint venture financing, providing financial management services for another firm. Or, you may serve as a partner with other owners or partners, making various finance decisions, such as investment, commercial lending, and acquisitions.
Many financial institutions provide business firms with both direct and indirect investments. A partner in a venture may invest in the company’s stock, increasing the value of the business. He can also purchase investments in financial markets, using his own capital to generate income.
Other forms of investments could include loans from banks and other financial institutions, such as hedge funds, venture capitalists, insurance companies, and real estate developers. A bank account could be opened for the benefit of a business firm by an associate investor. The associate investor has less risk than a private investor because he is not primarily purchasing physical property. He has the same potential for loss as the bank or other lender does, but his contributions are made based on the value of the firm’s assets, net worth, and net worth per ownership share. The key advantage of these types of investments is that they involve fewer risks than direct investments, which provide higher potential returns, and the rewards are almost immediate.