Business finance refers to the practice of overseeing your company’s financials. This encompasses everything from tracking expenses and addressing any potential financial issues to selecting financing solutions that suit the needs of your organization.
Business finance encompasses activities related to the estimation, procurement, utilisation and investment of funds needed for carrying out successful business operations. Furthermore, it assists organizations in formulating strategies which support organizational goals directly.
Financial Statements
Financial statements are formal reports on a company’s activities and financial position, serving as records that are useful to many parties involved with its business, from investors who use them before investing to strategic planning for other purposes.
There are three main forms of financial statements, which are balance sheets, income statements and cash flow statements. A balance sheet gives an overall snapshot of your business finances at any particular date; it lists assets (i.e. what your company owns) and liabilities (i.e. what is owed).
Profit and loss statements (or income statements) provide a record of your business’s revenues and expenses over time. They typically include your primary sales revenues as well as secondary or financial gains as well as expenses such as materials and labor costs; accounts receivable balances as well as assets not up for sale such as intellectual property are often included as well.
Cash Flow Statements
Cash flow statements are financial documents that track inflows and outflows of cash for an accounting period, providing insight into whether or not a company is actually producing enough positive cash flow to sustain operations. To do this, operating cash flow must be compared against net income after subtracting non-cash items such as accounts receivable or depreciation which have no bearing on actual cash.
An accurate cash flow statement may also make it easier to secure loans from banks and other lending institutions, since lenders will know you have sufficient spendable cash on hand to repay any debt you incur. Lenders typically look for three sections in your statement: cash from operating activities, investing activities and financing activities – this data can then be used in a financial model to predict future business performance.
Budgets
Budgets provide an estimate of expenses and revenues in an upcoming period, unlike profit and loss statements which merely look backward. Instead, business budgets predict future activity based on current strategies, goals, and the economic environment.
Operating budgets focus on expenses and cost of goods sold (COGS) that directly relate to sales revenue for a company, regardless of size. They should be created semiannually, quarterly or annually according to your fiscal year.
Cash budgets help businesses determine whether there will be enough funds available to cover fixed expenses like rent, mortgage/utility payments, employee salaries and accounting services. A labor budget helps determine how many hours will be needed to meet production goals so employees can be scheduled accordingly. Non-operating budgets cover one-time expenditures such as interest payments on debt and equipment purchases. AAT business finance basic courses teach how to create all three of these budgets effectively for decision-making, planning and financial forecasting purposes.
Financial Planning
Financial planning is the practice of allocating company resources. It involves setting growth objectives and forecasting revenue. Financial planning typically occurs as part of an effort between senior management, finance team and other departments such as marketing, sales and operations departments.
Financial plans typically consist of profit and loss statements, cash flow statements, budgets, business ratios and break-even analyses. A financial team should also account for fluctuations in market conditions that can significantly change how quickly a company expands.
Finance teams should be able to identify how much money the business needs each quarter and year to reach its goals. This information should be broken down by department so managers can see exactly what their specific responsibilities cost in relation to the overall budget, which allows the company to identify where spending can be reduced while still having enough for essential expenses.
