What it is and why you need to know

business finance
(© fizkes – stock.adobe.com)

Finance is the process of managing money. There are many different types in which this can be done, from investments to small business loans. Although it may seem like a daunting task, finance is something that everyone needs to know about and understand. In this post, we will cover what business finance is and why you need to learn more about it.

What is business finance

Business finance is primarily concerned with securing, allocating, and managing funds in order to maintain a business. Finance is a basic tool for growth. It provides the use of money today that will not be available tomorrow. Financiers typically try to raise long-term money to start or expand a business. All one needs is an idea and access to financing in the form of loans, stock, venture capital, or other sources.

Why do you need to know about it

In order to be a business owner, it’s required by law that you know about finance. Knowing the basics of finance provides both you and your employees with a set of financial understanding that will help them make good decisions on behalf of the company. It enables everyone in the company to take care of their legal and ethical responsibilities while at work without fear or confusion because they have received this training. You are responsible for being able to forecast cash flows pertaining to recurring credit instruments and deposits; product pricing strategies, including identifying trade opportunities; arranging the financing through debt providers or equity investors; determining what type of insurance coverage is necessary now or in the future so that there is no interruption due to insufficient funds when paying workers’ salaries or replacing equipment.

Types of business finance

  1. Equity finance- use of shares and stock for corporate investment.
  2. Debt Finance- using loans to invest in a company as opposed to direct share purchase.
  3. Factoring- using accounts receivable as collateral for a line of credit lubrication of the cash flow process by avoiding waiting for customers to make payment.
  4. Leverage finance- financing with debt (usually borrowing). Both equity and debt can be “leveraged” or borrowed, but only ‘debt’ refers specifically to leveraging investments with borrowed capital (making them riskier).

How to get started with business finance

First step is research: I suggest reading an introductory book on any type of business that you want to start up. You can go with a text like Freakonomics or other economics-based books, but in my opinion, the best opening texts are ones that touch on as many different subjects as possible – introducing you to the concepts and ideas behind all the pieces of running your own company, not just one piece in isolation from everything else.

There are many different financial methods and models that work for various situations. Not every company is the same, so it is important to research which kind of model is best for your needs.

When researching models, consider cash flow rate of return on investment (ROI), accounting system (PCL or double-entry), how you want to track receivables and payables, what accounts need to be covered in a chart of accounts, cost structures, or capitalization policies for assets vs expenses. The objective should be equity maximization while maintaining solvency needed in the long term.

Tips for success in your finances as a small business owner

1) Plan your finances carefully to meet all obligations and objectives. Consider income sources, cash-on-hand, assets, liabilities, etc. Always watch out for closing credits that will affect and change the balance or account.

2) Stay on top of your credit by checking monthly or more frequently when possible. Know who has access to it at all times in case unauthorized use is detected; changes can be made immediately if necessary.

3) Automatically transfer debt finance payments using advised methods to avoid missed late fees/penalties as well as a lower interest rate over time – Remember that personal loans are an option too.