Business finances is often described as the methodologies, systems, and strategies that are used to manage financial transactions for a business. Finance is a generic term encompassing matters regarding investments, the generation of funds, and the management of monetary resources. In business terms, it refers to three disciplines: accounting, economics, and banking. All these disciplines deal with the movement of funds in and out of organizations. This article discusses in brief how business finances is used.
The first part of business finances is forecasting. Forecasting is a process by which organizations come up with an estimate of future cash flows. It is based on many assumptions about the economy, including the position of the interest rates and inflation. This allows business managers to forecast and control spending, risk, earnings, and profits.
The second part of business finances is setting and monitoring business goals. Setting business goals is a key part of the management of the companies’ cash flow. An accountant is the best person to set business goals because he can determine which activities yield returns and which may have to be neglected in order to achieve good results. An accountant also determines the allocation of resources. For instance, in some businesses, it is usual for an accountant to allocate a fixed percentage of revenue or profit to assets and a different percentage to liabilities.
The third section of business finances is financial planning. This is the section of the budget management that deals with short-term financing needs. This includes financing for purchases and liabilities, working capital requirements, purchases made for growth purposes, and purchases intended to meet temporary shortages of cash flow. While performing this task, businesses must also keep in mind the long-term financing requirements for operations, expansion, and maintenance. A manager should know the appropriate strategy for each scenario and apply it in his planning.
For small businesses, keeping track of their cashflow shortfall is more complicated. Since small businesses do not usually have bank accounts with significant transaction history, they normally borrow funds from other sources for short-term purposes such as purchasing equipment, expansion, and debt repayment. The cash flow implications of borrowing from other sources are significant for small businesses. Moreover, since most of these borrowings come with variable interest rates, small businesses are unable to set their cashflow requirements at a single level and so they have to adopt various strategies for meeting various financing needs.
Whatever may be the scenario, every business owner must look after his/her business finances in an effective way. It is through effective management that businesses can successfully overcome any cash flow gap. An effective way to manage cash flows is through the timely preparation and accurate assessment of the balance sheet. The purpose of this assessment is to identify the total assets, liabilities, revenues, and expenses of the company. A well-prepared balance sheet enables an accountant to report all this information to the Board of Directors or the shareholders in the week following a business’s end.