What Is the Meaning of Business Finance?

While accounting tracks and organizes your company’s financial information, business finance uses this information to help you manage your money and make your operation more profitable. Business finance includes reading financial statements and connecting the dots between your profit and loss, balance sheet and cash flow statements. If these documents point to a shortage of capital, business finance also provides the tools to plan strategies for bridging the gap.

Reading Financial Statements

Your profit and loss statement tells whether your business is earning more than it spends or vice versa. Your balance sheet shows how your earnings and losses have played out and affected your company’s net worth at a particular point in time. Your cash flow statement provides information about how the funds flowing into your business and out of it play out over time. Business finance puts this information together, adding a layer of depth to your reading of these documents.

If your company is earning money but has no working capital, business finance can help you understand where your money has gone. For example, your accounts receivable total may be unsustainably high and you could improve cash flow by being more proactive about collecting the money owed to you. Reading your cash flow statement will provide additional information about when it’s most important to earn more income or have more liquid cash.

Strategic Business Planning

Business finance is an important tool for strategic planning, providing the financial grounding for your projections and plans. If you intend to introduce a new product, it can tell you how much you’ll have to spend to get things off the ground, synthesizing information about research and development, marketing upgrades and equipment costs. Business finance also helps you make forecasts and calculate how much of this new product you’ll have to sell to recoup your startup costs, and also how long it will take to break even on the venture. The strategic plans you create as a part of business finance help you determine whether or not your company is meeting short-term and long-term financial goals.

Finance and Financing

If your business encounters cash flow difficulties, business finance is an important tool for understanding and managing your financing options. By calculating interest and principal payments, and incorporating this information into current and upcoming financial statements, you can make savvier choices about how much to borrow, which borrowing options make the most sense for you and how to plan your repayment schedule. This planning and strategizing will leave you with more money in the long run, which you will be able to manage most successfully if you’re skilled at business finance.