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Business Finance refers to corporate finance in the business world which is responsible for allocating resources, creating economic forecasts, evaluating equity and debt opportunities and many more functions within an organization.
Even though small businesses do not have a separate finance department in their organization, but they still carry out all the functions operating throughout the business.
If you are a finance student or if you have just started your job in the finance department, here is everything you need to know about the functioning of business finance in an organization. Let’s have a deeper look.
Major Functions of Business Finance
Guides Financial Planning
This method helps in identifying –
- how much reserves should be kept by a business in case of any emergency?
- how much money is required to operate the business?
- how will the company receive the funds?
- how to allocate and spend that money on resources?
Budgeting is a popular planning tool which can forecast efforts and can be prepared on spreadsheets. Financial planning is important to keep a track of the expenses, spending and saving of the business.
Helps in Finance Management
With important and essential functions of business finance in an organization, decisions of a finance manager are critical and crucial for the financial stability of the business. Also, the decision of investing taking in consideration the value of project and the expected return on investment.
- Decision Making
Finance manager’s role is to make decisions like determining the allocation of dividend among the stakeholders, how to use the savings wisely and how to distribute retained earnings.
- Long-Term Capital Investment
Investing in general assets and capital budgeting is a part of long-term investments. It evaluates the future risk and cost of expenditure and the return value.
- Short-Term Capital Investment
Investing in high-yield savings accounts, money market, government bonds and treasury bills is a part of short-term capital investing. It is done for a tenure of 3 to 12 months, after which the investment is converted to cash.
Setting Financial Objective
One of the functions of business finance is to develop financial goals and objectives which remain stagnant until they have reached a threshold of profitability. It is true that developing financial plans without having a proper knowledge and setting the financial goals and objectives will lead into turmoil and no profitability for the business.
The strategies and techniques of achieving a goal or objective is the backbone of a company’s financial obligation to meet the bottom line of using the funds correctly.
Use of Finance Formula’s
Business Finance Formulas provide information on investments made for growth opportunities and business operations. These formulas help the business compare their total cost of financial decisions in terms of profits and losses. By setting the minimum return percentage higher, it ensures maximum profitability for the business.
These formulas are used in several functions such as Return on Investment, net present value and payback period in order to ensure long-term viability of the business.
Performing Business Finance Analysis
To rely solely on formulas would be a mistake, therefore, a qualitative analysis can round out the decision-making process by including expertise and personal experience. Using the survey results or the brand image or any other kind of non-measurable data can help you analyze the situation qualitatively.
Information that cannot be measured or quantified is used in the qualitative analysis. Even though it does not mean that formulas are useless or do not work perfectly, this analysis tool rather gives the managers a greater level of comfort when they make their final financial decision.
Businesses’ Financial Forecasting
This kind of forecasting helps in determining the company’s future financial status including the capital expenses, profits or losses of the stakeholders and investors and much more. Even though these forecasts are not a 100% accurate and promising, it still is a method to evaluate any financial risk for the stakeholder’s investment or returns.
A business uses these forecasts to develop new strategies and plans which might help the business grow to their fullest potential in the future.
Capital Budgeting
Once the forecasting of the business finance is complete, the budgeting process begins. Preparing a budget with numerous line items representing dollar value and proper allocation of the capital in terms of assets or equity, helps in gauging spending and saving practices which might hinder the financial objectives of the business.
Budgeting is important to create and adhere to, because it helps in evaluating the financial risks, maintaining the balance sheets of the business and also to keep a financial track of the funds coming in and going out.
Creates Factual Financial Results
Using the mathematical and statistical formulas, any business can create factual financial results and establish facts related to business information. The financial facts can be established based on the current economic conditions and if the market is ready for your products and further plan.
Internal business formulas aim at eliminating waste and expanding production and output in operations, whereas, external business formulas aim at examining the potential opportunities associated with accomplishing the business goals and objectives.
Manages Payables and Receivables
Business finance manages the payables and receivables of the organization. If the business has a finance department with several staff members to manage cash inflow and outflow, it is easier for creditors, vendors and employees to expect prompt payments. To keep running the operations without obstacles, it is important to execute the right amount of liquidity.
Helps in Maintaining Financial Books and Reports
With a simple process of registering all the financial transactions occurred and keeping systemized books to record, analyze and interpret the day-to-day financial transactions of a business simplifies the complicated task of maintaining financial books and confusion in records.
Also, if a business has shareholders or outside financing, they will have a standard requirement external reporting. Maintaining reports is also important for budgeting and data forecasting for stakeholders to determine the right time to buy or sell their stocks. This process relies on accurate data for making final decisions.
Final Words
Following the above functions and principles, your business is on the path to grow and succeed. Business Finance being the backbone of the organization, these functions help in acquisition and conservation of capital funds fulfilling the financial requirements of any business enterprise.
