Business finance is a broad term encompassing various things regarding the science, creation, management and utilization of financial resources and funds. In particular, it covers the issues of how and why an entity, business or government acquire the funds necessary to conduct business or to finance operations. It also covers the questions of why those resources are used in the first place, what they will be used for and who is responsible for managing those resources once they have been acquired. This is an extremely important area of business because the way funds are handled can greatly affect a company’s growth and profitability. Thus, great attention should be paid to developing sound business finance policies.
There are two main areas of the business that require close scrutiny when it comes to financial management: the short-term and the long-term. A company must have a financial management policy that is flexible enough to meet the needs of all types of financial situations. For instance, if the owner decides to sell the firm at some point in the future, the financial manager must be able to accommodate potential circumstances such as buyouts by other firms, mergers and acquisitions and financing agreements with banks. Likewise, the financial manager must be able to deal with situations such as bankruptcy, repurchase, leaseback, business line of credit, owner financing and payment of payroll taxes.
The long-term focus of the manager is slightly different from the short-term focus. The long-term goal of most financial managers is to ensure that a firm is profitable enough so that capital gains are realized. However, financial managers also need to ensure that a firm has a sufficient cash reserve to weather temporary cash flow shortages and other economic problems. Therefore, the manager must be able to forecast the revenue and expense requirements for a firm over the long-term and respond appropriately to changes in those requirements.
Strategic planning is an important part of business finance. This planning addresses how a firm can maximize its current assets to achieve its goals and minimize its current liabilities to achieve its goals. Strategic planning also involves identifying where the firm will make investments in order to achieve its long-term viability. Additionally, strategic planning helps to develop the firm’s management systems so that they are able to coordinate external resources to accomplish business objectives.
Finally, the ability to act quickly and efficiently is an essential part of business finance. It is essential that a firm is able to raise capital when it is needed. Capital always requires financing, but businesses must be capable of raising capital quickly and effectively. Prompt capital raises can help a business meet its short-term cash needs and meet projected financial needs, although these needs may not necessarily be realized immediately. Therefore, firms must be able to raise capital on a timely basis in order to maximize its overall profitability.
All of these key components focus on financial management and the ability to plan for the future. In order for a business to effectively take advantage of financing opportunities, managers must be properly prepared to act on the basis of current financial information. As financial planning and capital raising activities are integral to a firm’s viability, effective financial management ensures the long-term viability of the business.
A firm cannot effectively use capital and financing, if it does not have the right quantitative and qualitative analysis tools in place. Quantitative analysis tools include current and short-term financial statements, profit forecasts, operating, marketing, and finance models as well as the costs and receipts of sales and assets. Quantitative analysis tools also include loan and lease programs, investment and reinvestment plans, risk assessments, and liquidity and capital management plans.
Quantitative analysis tools are used to obtain a complete picture of the company’s entire balance sheet. The analysis focuses on both current assets and current liabilities. This includes a detailed description of the current ownership structure, current assets held by the corporation, and its current liabilities. Short-term assets and liabilities are also described. The purpose of this exercise is to obtain a more complete picture of the company’s balance sheet to make the necessary business decisions. The short-term goal of this exercise is to improve cash flow and reduce the net debt of the organization.