Finance is often referred to as the part of business management that concerns itself with all financial aspects that can affect a business’s bottom line. Finance is actually a wider term for things about the science, creation, management and research of assets and investments. In particular, it concerns itself with questions of why and how an individual, institution or government get the funds needed for business activities to be successful. This includes finding investors to back the venture and the need to know when to cash in on those investments. All of these topics are involved in the science of finance.
There are several ways that business finance affects a business in terms of profitability. These include having a plan to achieve profitability, the use of capital assets such as equipment and supplies, current liabilities, retained earnings and surplus, as well as potential liabilities. Understanding all of these concepts is critical for a business to have long-term viability.
A good business finance manager should understand all of the components of the business and its structure. He must have solid knowledge of accounting, economics, law and other pertinent financial subjects. A manager must be capable of making sound financial decisions even during times of economic hardship. This is particularly so if the manager has to manage the funds of the firm by working around the clock. Therefore, an accountant, a business broker, an insurance agent or even a chief executive might need to be involved in the process.
When a firm is trying to raise funds, the managing partner may have to make a number of financial decisions, including those that will affect the firm’s profit margin and possibly cause it to fail. In order to make sound business decisions, the members of the business finance committee must be able to communicate effectively with each other. The effectiveness of the communications depends on the level of trust that exists between the members of the committee.
The members of the finance committee must also be able to make sound business decisions concerning investment strategies and the provision of short-term financial operations. Short-term operations are critical to a firm’s profitability and success. Therefore, the finance manager must be able to evaluate short-term profitability in a timely fashion. Most managers and other business owners do not have time to perform the necessary analysis in order to meet their profitability goals. Therefore, the members of the finance committee must have an opportunity for one-on-one sessions with the manager to discuss investment strategies and the provision of short-term finance.
Another important factor that must be considered when budgeting is the consideration of the manager’s forecast for funds. The manager estimates the amount of cash that will be available to invest in assets and supplies in order to meet the projected demand for funds. There are two ways to develop the financial forecasts. One method involves using the present value of future cash inflows over the period of the investment. This method is relatively simple because all the relevant information that will affect future cash inflows is available in the control records. The other method involves the use of financial forecasting formulas that use discount rates to project future cash inflows.
As with all aspects of business finance, the development of reliable and effective business finance forecasts is a process that requires the input of the finance department. A strong understanding of the impact of discount rate changes on the cash flow forecasts is an important element of the process. The ability to make good forecasts is dependent upon the collection of relevant information such as current business sales and accounts receivable, operating costs, retained earnings, and prospective cash inflows. A well-built finance department should be able to provide the manager with accurate business finance models that take into account the various factors affecting the supply and demand of funds.
If you want to learn more about financial forecasting, the first step is to contact an independent professional, financial consultant. There are numerous professional finance managers that offer free financial forecasting and management assessments. These professionals can help you identify your company’s cash flow needs and can assist you in developing a sound plan for meeting these needs over the long term. Good managers help you determine which financing options are best for your firm and can help you find the right vendors for your products and services.