What are finances for business? (A management guide)
What are finances for business?
To build up a more informed view of how a business runs, you may have asked the question, ‘What are finances for business?’, in addition to how they’re sustained and developed. Business finances are finances that help you to manage your business effectively. They cover all monetary aspects of a business, from income to expenses, and can also refer to the funds you might use to keep a business running. Managing and implementing your business finances effectively makes your business or organisation more efficient and profitable.
Managing your business finances
There are a number of things to consider before and during the management of your business finances. They include:
1. Follow your cash flow
Cash flow refers to the money that’s put in and taken out of your business within a certain timeframe. The money entering the business involves capital and income, while money taken out mostly revolves around expenditure for the upkeep of the business. Examples of income are purchases made by buyers for your services or goods. Expenditure reflects expenses such as rent and employee wages. There are two types of cash flow: positive cash flow and negative cash flow. Positive cash flow refers to when a business owner has more profits than expenses.Cash flow is very important to the success of a business because the most necessary thing to maintain a business is money. Without sufficient funds, the business can fail. One of the most important times to keep a positive cash flow is at the early stages of your business to ensure the possibility of further development.
2. Follow the basics of accounting
Accounting is a fundamental aspect of any business. To ensure a company’s success, it helps to maintain good bookkeeping of your transactions and tax payments. If you intend to run a small business, good accounting ensures you follow all necessary rules and regulations. If you work for a company, accounting provides accurate figures for expected workloads and outputs, along with payments such as salaries.If you want to run your own business, try to be aware of the following accounting basics:
- Use a fresh account: This is a new, separate current business account that can save you legal problems in the future and help you to segment your finances for business. When opening a business account, make sure that you’re fully aware of any additional fees.
- Consider using cloud accounting software: Although some people prefer to run parts of their businesses manually, it can be very time-consuming for small businesses to complete paperwork and implement an effective filing system. By using cloud accounting software, you streamline the management of your accounts and can focus on other things such as business development.
- Consider hiring an accountant: It’s easy for new small business owners to become overwhelmed by their finances. If possible, consider hiring an accountant to monitor your books, operate accounting software and translate financial data into a format that’s easier for you to understand.
3. Plan your business finances
After considering your cash flow and accounting basics, it’s necessary to plan an effective way of managing your business finances. This includes keeping records of transactions in a place that’s easy to access. The goal is to generate an effective financial statement, which can inform you of what’s going right and wrong in a business. It can also show future forecasts, allowing you to prepare for any problems in advance.The main documents to include in a full financial statement are:
- Balance sheet: A balance sheet shows you the end financial point of your business at a particular time, with assets, liabilities and equity. Using these three factors, the balance sheet can calculate the worth of your company.
- Profit and loss statement: This statement summarises your business revenue against its expenditure annually. You can use this to assess the potential profitability of your company.
- Cash flow statement: A cash flow statement shows the movement of money in and out of the business through a given timeframe, usually monthly or quarterly. It involves determining the current state of the business.
- Break-even analysis: This ascertains the number of units to sell or the amount of money to obtain to cover your business expenses. New businesses regularly don’t break even, but it can reflect poorly on their finances for business and worth if this continues.
4. Business finance options
If your business requires additional financing, various options are available depending on the type of business and the time frame required. Financing options include short-term business loans, long-term business loans, bank loans, invoice finance, business grants, crowdfunding, business credit cards and venture capital. Try to be aware of which options are most applicable to you.There are two main types of business financing methods with their own advantages and disadvantages. These two methods are:
- Equity financing: In this, an investor gives money to the business. The investor then automatically becomes a stakeholder of the business and may play a part in its operations.
- Debt financing: Here, the lender doesn’t become the owner of the business. The lender, usually a bank, instead charges interest on the borrowed money.
5. Debt options
When it comes to finances for business, you might want to consider taking out a loan to build or support your ideal business. If so, remember that debts require payment and interest. By developing a full financial statement, you can assess whether or not a debt is necessary and payable. If you can explain a debt in this way, you may call it a ‘strategic’ debt. Taking on debts carelessly, especially unnecessary debts that you cannot explain through your books, can affect the fortunes of your business.Related: 10 essential finance manager skills
Ways to maintain a healthy debt balance
Here are some of the ways you can maintain a healthy debt balance:
- Save emergency funds: Plan ahead by keeping some savings in an appropriate business account that you can use when unforeseen situations arise.
- Spend on what’s necessary: Taking on debts requires you to be frugal. Each transaction related to your business, and potentially your personal life, requires scrutiny to ensure it’s absolutely necessary.
- Try refinancing: If you’re paying back a loan at a higher rate than the current market rate, you might want to think about refinancing it with a loan that has a more conservative repayment interest. Pay off any personal guarantee debts before doing this to protect your assets.
- Make good deals with suppliers: Never be afraid to negotiate a better deal for yourself or get a discount with your suppliers whenever you purchase in bulk. You can even join other businesses to afford bulk purchases.