Business finances is the study of the financial resources available to a company to handle its daily operations. It includes the funding of permanent fixtures, equipment, and supplies. Financial matters are usually managed by an accountant, bookkeeper, or business broker. All of these professionals are considered part of the business finance management team.
Finance is really the method of channeling funds from investors and savers to businesses that want it most. This includes lenders, such as individual and corporate borrowers, banks, and other financial institutions. Private investors typically have money on hand that can make the interest or dividends available to businesses that can prove a need for them. However, banks work with businesses that are sure they can repay the loan in the long run. Short term finance refers to those needed for only a short period of time like a month or two while medium term finance lasts a year or two at most.
The cash method of keeping track of business finances is considered to be the most practical method. The cash method involves the recording of cash transactions as they occur rather than waiting for journals to record financial information. The cash method requires more attention to detail and record keeping but is a more accurate reflection of financial records. The accrual method, on the other hand, is less accurate but is more practical for most business owners.
Accruals and debits come from the business needs of the day. For example, sales revenue may come from products bought from the supplier and then sold to customers in one day. A business needs to record the sale of each product on its financial statements so that it can calculate its profit on that day. Because sales and expenses must be recorded for a company to keep its business finances running smoothly, the cash method of business finances makes more sense for those running a business that earns income from many sources.
A small business needs to devise its own set of business plans so that it can plan for its future finances. With a good set of business plans, owners can predict how much money their businesses will earn and how they plan to spend the profits. With a well-written business plan, a small business owner can easily calculate future cash flows and budget for future costs. The cash flow projections of a business plan also show how the business will adapt to changes in its market conditions.
Every business owner should understand his or her own personal finances as thoroughly as possible. Cash flow management and budgeting are crucial to the success of any business. In order to run a successful business, a business owner needs to be financially savvy and capable of forecasting future cash flows. Learning about the basics of small business finances will help you become an expert when it comes to finance.