Business finance is a broad term encompassing concepts related to the study, development, management, and accumulation of funds. In simple terms, Business Finance refers to the methods, techniques, and strategies that support a firm’s ability to obtain, manage, and use capital assets. The ultimate goal of business finance is the creation of long-term sustainable competitive advantages. The concepts and principles of business finance are complex and not well understood by most managers. As a result, many companies are at substantial risk of going under and even going bankrupt.
Understanding the concepts and principles of business finance requires an overall understanding of the financial system and the techniques and methods that finance is done. Most managers do not focus sufficiently on the financial aspects of their operations. For this reason, they can have a difficult time implementing sound financial strategies. For example, poor cash flow management can lead to excessive financial risks and should be monitored to avoid economic deterioration or failure. Poor fund flow is one of the major causes of unsuccessful operations.
One of the essential concepts and principles of business finance is budgeting. Proper budgeting enables the manager to understand both short-term and long-term financing needs and set budgets to provide stability over time. Proper budgeting also allows the manager to make the right decisions regarding investments and acquisitions. Ultimately, successful budgeting offers a solid foundation for sound financial planning and sound investments.
Another key concept of business finance is cash flow analysis. Cash flow describes the movement of cash in and out of business. This includes all incoming and outgoing funds and the temporary storage facilities created due to those flows. Good cash management is essential for companies that anticipate future increases in operating costs and those that rely on cash revenue to meet short-term cash requirements.
With the rise of the Internet, more businesses are turning to their computers to create their budgeting and forecasting processes. Online computer software helps with budgeting and forecasting by collecting and analyzing information from financial documents and integrating them into a comprehensive picture of its activities. Anyone with access to the Internet can accomplish budgeting and forecasting.
Finally, business finance experts use financial modeling and several economic models to forecast the profitability of different projects. They examine a company’s balance sheet, working capital, short-term and long-term assets, operating expenses, liabilities, ownership interest, reinvestment, net worth, profitability, and reinvestment. The variety of models and their applicability makes forecasting a practical process for investors, lenders, customers, and executives.
Simultaneously, sound business finance decisions and prudent investment practices improve the profitability of a company. As stated earlier, good cash management and sound investments enhance the profitability of a company. By improving the profitability of a business, profits increase, and company sales and gross revenue increase. Ultimately, profits are maximized by its ability to invest its retained earnings into its growth objectives. In addition, a company’s ability to invest in key growth markets enhances its competitiveness and enhances market share.
A company’s income statement, balance sheet, income statement, profit and loss statement, and cash flow statement demonstrate how revenues produced by the operations of the business flow through to the end of the period for which they have been generated. It is important to carefully match the start of each period with the end of that same period to have a complete view of the companies’ performance. All of these reports are necessary for making sound financial decisions and forecasting future profitability. Without these reports, it would be impossible to make strategic, operational, or investment decisions.