Business finance is an essential aspect of growth and the success of any business. It helps structure the business’s daily operations and guide decision-making. Can you imagine a successful business without a finance department? None, right? That’s how essential it is in everyday business operations, and if you are wondering what the important business finance functions are, here’s a quick read to find them out.
What is business finance?
Business finance is the management of the company’s funds to ensure there are enough funds to operate the business. It holds responsibility for resource allocation, economic forecast creation, equity and debt finance reviews, and more. Its primary importance is maintaining the smooth run of the business by ensuring a stable financial position.
Objectives of finance functions
The different business finance functions all have common goals, which include the following:
- Determine the required capital to start and operate the business continuously.
- Establish the composition of required capital for the business to operate.
- Set financial policies for controlling cash, lending, and borrowing.
- Ensure all resources are maximally utilized for maximum return in investment (ROI) and reduced costs.
Classification of business finance functions
The finance functions are classified into three timelines which are the following:
This refers to the needed finance in less than a year. These include funds from bank overdrafts, commercial paper, trade credit, and advances from customers.
This is the finance needed in one to three years. These funds come from bank loans and financial institutions.
These are the finances planned in three years or more time. These are typically investments sourced from the capital, long-term loans, internal funds, and more.
What are the important finance functions?
Here are the different finance functions for every business:
1. Investment decision
Investments are the long-term assets that every business must take into account for high potential yield in the future. Also known as capital budgeting, this function requires the smart allocation of funds into investment opportunities that demonstrate high profitability.
There are two primary aspects of investment decision, including:
- Evaluation of new investment ventures in the subject of profitability
- Comparison of the cutoff rate against new investment and the prevailing ones
The investment decision comprises the capital allocation for long-term investments and the decision-making if low-yield assets should be sold off. Some other aspects it covers include the management of capital, management of mergers, and buying or leasing assets. To sum it up, investment decisions must yield profits and cut down costs.
2. Financial Decision
The financial decision refers to the creation of business decisions about where to get funds from. It includes deciding when, where, and how a business will acquire these funds.
Two primary sources need consideration in financial decisions, including:
- The equity
- The debts
From these two, the financial manager will decide on the perfect mix of short- and long-term financing to be made. This ratio is commonly called the firm’s capital structure. And a sound capital structure aims to maximize the shareholders’ returns with minimal risks.
3. Dividend Decision
This finance function pertains to the decision regarding distributing all profits to shareholders, retaining all profits in the company, or distributing a portion of the profits to shareholders and retaining the other portion for the business.
The financial managers will decide on the appropriate dividend policy that will maximize the business’s market value. With that in mind, they will decide on the most optimum dividend payout ratio for the shareholders. This is a standard practice when the business is doing well in terms of profitability. They pay out dividends to the shareholders or give them bonus shares.
4. Liquidity Decision
Liquidity means that a business has enough resources to pay bills on due and enough cash reserves to keep the business running regardless of emergencies. This is the decision an organization makes to manage the current assets so the business won’t fail at making payments and become insolvent.
Once current assets begin to be non-profitable, they should be appropriately valued and considered for disposal. That is because the current assets must be used in times of liquidity and insolvency.
5. Financial Goals
Business finance is an essential component of setting the financial goals and strategies of a business. Through the finance department, it’s easier to define the business objectives by starting from the bottom-up. And these goals are vital in knowing whether the organization will reach the profitability threshold or remain stagnant even after the collective efforts to improve the financial position.
Having set the right financial goals is important in the organization as it serves as the blueprint in attaining profitability. Remember, the financial strategies should align with the business goals. And it’s the finance function that ensures the company has a strategic plan to meet bottom-line targets.
6. Budget and Forecasts
When making a financial decision, budgeting and forecasting come next. Budgeting is the planning tool that resulted from the forecasts. You design a budget to allocate a specific amount of money for the expenses. Budgeting makes it easy for businesses to stick to the allotted amount to remain on track with their finances.
On the other hand, forecasting serves as the tool to predict how the organization’s financial position will look like. Its primary purpose is determining sales and expenses that will materialize in the coming financial calendar. Also, it makes the business, investors, and stakeholders aware of the financial risks. This forecasting shows investors and stakeholders how profitable the business will be.
7. Accurate reporting
Preparing financial statements is necessary for every business. It doesn’t just let the business get a glimpse of the overview of how its financial transactions went for a given period, but it also allows shareholders to know how profitable the company is. Typically, when external parties are involved, like shareholders and lenders, you will have to provide these reports. It helps them decide when to buy and sell shares from your organization.
How the business operates highly relies on the functions of finance. Each function aims to lower costs, grow sales, support business, invest in the right places, and control the business environment. Business finance helps create strategic planning and decisions to bring success to the finance department and the whole organization.
Why does a business need finance functions?
Here are some of the reasons why a business needs the finance functions:
It helps establish the business.
Business finance enables a business to build and maintain operations. Money funds the capital, labor, and assets that a business needs to start. Business finance determines all this so a business can establish itself.
It maintains business operations.
Business finance helps you maintain operations by ensuring the business can afford to pay its expenses. These expenses include labor costs, utilities, asset procurement, and more.
It helps a business expand and diversify.
One of the critical business finance functions is its assurance to grow the business over time. It contributes to ensuring profitability by expanding what the business can offer and diversifying the fund sources. This way, it can maintain operations and stay modern.
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