Money is allocated for daily operations and special projects, in appropriate amounts, by the finance function. The goal of a business firm should be to allocate money to the functional areas of the company in a manner that maximizes the wealth of the owners. That is the responsibility of business finance.
What Is Business Finance?
Business finance is one of the most important areas of a company since money is the driving force of a business. Accounting is responsible for taking the raw financial data generated by a business firm and developing the financial statements for the business owner. Finance, in turn, steps in to read and analyze the financial statements and supporting documentation.
The finance function uses financial statements to plan for, obtain, and manage the business’s money.
The business finance function is responsible for the management of the company’s money, the process of obtaining funds for the company, and the management of how much risk the company should take in order to return an adequate amount of money to the owner(s).
In a small business, business owners and managers should have a basic understanding of business finance even if they outsource certain areas of their financial operations. For example, a small business may outsource at least part of its bookkeeping and accounting. Becoming familiar with the basics of business finance can give an owner some additional tools to help understand the financial complexities of business ownership.
The three major areas of business finance are corporate finance, investments and financial markets, and risk management.
Corporate Finance
Corporate finance is a broad description of the planning, management, and control of a company’s money. Corporate finance includes working capital management, financial statement analysis, cash budgeting, capital budgeting, and more. In a small business, the owner/manager conducts the daily financial operations of the company. In larger businesses, daily finance decisions may be made by the owner/manager, along with a finance committee. Larger financial transactions may need to be approved by the Board of Directors of the firm.
Corporate finance includes the management of the following areas of the finance function:
- Working Capital Management
- Cash Budgeting
- Financial Analysis
- Financial Statement Development
- Capital Budgeting
- Dividend Policy
In a small business, the owner uses this financial information to keep track of the account balances of the cost, revenue, and expenses found on the income statement, and the information from the statement of cash flows.
This information is used to create measurements to gauge the company’s financial performance.
Performance is measured by developing metrics such as the current ratio—the ability to pay your financial obligations on time.
The balance sheet, income statement, and cash flows statements are generated for accounting purposes. These statements are required for companies that are publicly traded—they have issued stocks to investors on a public trading market—but they can be used to analyze private businesses of all sizes as well.
Financial analysis is usually used as a method of determining a company’s liquidity, solvency, and investment potential. It can also be a vital tool for a business to use internally to view the financial performances of different departments, operations, or processes.