While accounting is a way to maintain a company’s activities, finance is also generally the bloodline of any business. Finance goes through every part of the company’s operations. And seldom are there decisions made without the financial management’s approval.
Finance is crucial for almost all business decisions – planning, budgeting, cash flow management, capital structures, risk management are all influenced by finance.
The Most Important Financial Metrics
Finance for Streamlined Planning and Budget
If you don’t have a map to your destination, you definitely wouldn’t take that road trip. The case is the same if you are running a business. You establish where you want to bring your business, identify the purpose, and ask your finance department the cost to reach your destination. These plans are the grounds for hiring employees, capital investment, funding, marketing campaigns, and management bonuses.
Loan or Equity?
A good financial analysis allows you to identify where you should get funds to get the business running. Is it feasible to raise funds from investors or is it more sensible to take out a business loan?
Finance For Better Cash Flow Management
Small business owners always need to be aware of how much cash is in the company’s bank. The entrusted finance people can give answers to this kind of questions. The role of the finance manager is to ensure that the company has sufficient liquidity to pay merchant suppliers and employees punctually. If the cash becomes tight, the finance staff will arrange to use the line of credit from the company’s bank.
On the other hand, if there’s too much idle cash in the company’s bank account, this may cause the company’s return on investment to decline. Financial analysis will find this and will find better investment to generate better returns.
Profit Planning and Cost Management
Because the basics of a business are to produce earnings, it seems sensible that finance takes on a major function in finding strategies to strengthen revenue. This could include identifying the profitability of an individual product, eliminating the losers, and endorsing the winners. Finance points out approaches to improve manufacturing productivity or locate sources of cheaper materials.
On another note, finance also can determine if it is feasible for a company to invest in trading stocks such as in the world oil trade or in other commodities such as silver and gold.
Financial Management by Exception
Small businesses are regularly going over their financial statements and searching for expenditures that go beyond the company budget. This is referred to as financial management by exception. If all things are consistent with the profit plan, there is no problem. Otherwise, the administrator’s attention is required to correct any deviation.
Controlling Inevitable Risks
Any business owner knows that running a business is a risk. Owners are concerned about interest rates, currency fluctuations, commodity price fluctuations, and the risk that customers may miss out on payments. Financial reports track these critical risks and provide a timely report to managers and owners.
Financial management assesses the challenges of international markets, inspects the credit ranking of customers, reviews the loan terms from loan providers and gives an evaluation of the challenges in these sectors. There is nothing ever certain, and finance puts these threats in a proper angle.
The function of finance in every business is essential. Company owners use their financial data daily to make crucial decisions. They utilize finance to properly analyze the current company situation and plan for the future. Businesses are unable to function without the help of financial analysis.