Business finance is one of the most essential areas of business in conjunction with management, human resources, marketing, production management, and information technology.
Business finance is essentially the business's life, which is why it is so important for small business owners to understand and learn more about it if they want to help their business succeed.
Business finance and accounting tend to go hand in hand, which means that business finance is essential for a business to operate in any capacity, as each area of the business will require money in order for it to be able to operate and work.
Whether it’s the daily costs, or for a specialized upcoming project, it’s up to business finance to successfully allocate money to each area of the business in a way that is not only going to allow the business to work, but to also maximize a profit too.
So, if you want to learn more about the different areas of business finance, and how they are able to help your small business, then read on, and we’ll explain everything you need to know.
Business Finance: What Is It?
Without money, a business is simply unable to operate, which is why business finance is so important, especially for small businesses.
For example, accounting is ultimately responsible for taking the financial data of the company and creating statements for the business owner, it is then down to business finance to analyze these statements and to manage the money of the business appropriately.
Business finance is also in control of gaining more money from the company as well as managing the amount of risk the company should take to provide a suitable return on investments (see also 'What Companies Are In The Finance Field?').
Small business owners should try to have a good knowledge of business finance, as it will help them to understand exactly how the money of the business should be managed, despite whether or not they outsource some of the financial operations of the business, such as accounting or bookkeeping (see also '10 Best Options For Financing Your Small Business').
The key areas of business finance are Corporate finance, investment and markets, and risk assessment.
Having even a basic understanding of these three areas of business finance will ensure that small business owners understand more about how difficult business ownership can be financially, and will help them to prioritize profit.
Corporate Finance
Although corporate finance is considered one of the key areas of business finance and involves the planning and the management of the business’ money, it’s actually an umbrella term that houses a load of smaller sectors of business finance.
This includes things such as financial statement analysis, working capital management, and cash and capital budgeting.
For a small business, these types of operations will be run by you as the business owner, which means it’s also down to you to keep up with the balances of the costs, revenue, and expenses that can be seen on the income statement.
This is where your performance as a business is determined. Additionally, income statements, balance sheets, and cash flow statements are made too, and are required for publicly traded companies with stocks that can be bought on the public market.
Investments And Markets
The second area of business finance is investments and markets, which can be extremely beneficial for a small business if managed correctly.
Businesses are able to invest in stocks of other businesses or companies, which could lead to a return from dividends or capital gains, and this also means that the business that has invested in the stock owns a piece of that company.
Bonds (debt securities) are another form of investment for a business, and is essentially a way of owning a portion of a company’s debt, with money being made on the return of the principal, as well as interest payments.
There are also things like commodities (such as coffee) or derivatives that a business can invest in too, although these are slightly less common, especially for a small business.
These investments are helpful for small businesses as they’re a way of bringing additional income into the business and can help the business to grow and expand by using any potential return on investments they might make.
Risk Assessment
Risk assessment and management is the final section of business finance, and is also arguably the most important. This section deals with identifying and analyzing potential risks to the business in a number of different areas.
The return a business makes from investments must be at least equal to the risk involved, otherwise, the business will ultimately lose money.
Risk management also looks at aspects of the business such as insurance too, which is essential if the business is at risk of things such as natural disasters or theft, otherwise there will be no protection and the business will lose money.
Ultimately, risk management and assessment is important for your small business, as without it there’s a good chance that your business will never succeed.
Your risks need to be worthwhile but also can’t put the business in danger of losing so much money that you end up going bankrupt.
So, if a small business is going to be successful, then proper risk management is the key to ensuring that the business is able to make successful and calculated risks that provide a good return on the investment and that don’t impact the business in a negative way.
Summary
To summarize, all three areas of business finance: Corporate finance, investments and markets, and risk assessment, can help a small business, as they can ensure that the business is able to make enough money to turn a profit, and grow itself simultaneously.
So, as a small business owner, you should look to further your knowledge of business finance if you want to be successful!