Business finance is that activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and the overall objective of the business enterprise. The overall functions of business finance can be divided into two groups both are described below:
Functions of Business Finance
1. Managerial Functions: It includes two important decisions of a finance manager.
Investment decision: Investment decision is taken by valuing different projects where expected return and risk are considered. Investment project or assets can be divided into two categories:
Short-term investment: In this case investment is made in current assets for one or less than one year.
Long-term investment: Capital budgeting is concerned for investing in term project where the following things are considered: overall assets and cost, expected the future return, the risk of expected return, cost of capital.
Financing decision: The second function of the financial manager is to decide about the allocation of dividends among its stakeholders. In this case, retained earnings are also considered.
2. Routine or incidental functions: Some other functions are also accomplished by financial managers. These are commonly known as routine works:
- Fund collection
- Reserve maintenance
- Information collection
- Preparing financial statements, etc.
Many people gain an understanding of financial theories as kids. When parents ask their kids to do chores in exchange for an “allowance,” this monetary performance creates an elementary perception of finance.
Fast ahead 20 years, and you’ve exchanged chores for your own business. Now, you find yourself relying on another variety of fiscal entities: business finance. Although business finance still takes care of your “allowance,” they serve many other primary functions that can help your firm realize growth.
Raising and managing stores by business organizations. Such movements are usually the concern of senior administrators, who must use financial forecasting to explain a long-term plan for the firm. Shorter-term resources are then devised to meet the plan’s intentions.
When a company plans to develop, it may rely on cash reserves, expected progress in sales, or bank loans and trade credits prolonged by suppliers. Managers may also decide to raise long-term capital in the form of either debt (bonds) or equity (stock).
Financial goals and strategies need to be planned
Every business has a bottom-line because every industry has organizational goals. Company finance helps companies define their financial aspirations so that they can determine the bottom-line for success.
By establishing financial goals, a company will know whether they’ve entered the threshold of profitability, or if they are remaining inactive. According to a June 2005 report in “Business Finance Magazine,” Chief Commercial Officers, who oversee banking finance operations, are growing more involved with necessary planning efforts.
The reason is that without well outlined strategic plans, companies might not have the understand how to achieve profitability. Because financial policies tie back to the company’s intentions, business finance is tasked with the liability of making sure the organization has away.
Financial planning for business
According to Valencia City College in Orlando, Florida, it is the method of determining how much money a firm needs to operate on, how much keeps the company should maintain for a rainy day and, how the company will hold the money (loans, revenue).
And how that money should be consumed and allocated throughout the industry. Budgeting is a common type of financial planning tool. Business finance creates budgets through forecasting purposes.
Budgets are provided on spreadsheets that contain line parts, which represent dollar values for how much capital will be budgeted for that particular value. They are especially useful for keeping financial exercise on track, as well as measuring a company’s spending and saving habits.
Forecasting of financial
Harvard University’s economic forecasting guidelines explain that a company’s feat relies on economic forecasts.
Forecasting is a type of forecast that calculates what a company’s expected financials will look close. Business Finance performs financial projections to determine things, such as what the company’s commerce volumes will be and what kinds of capital investments they will have.
Stakeholders and investors are particularly involved in financial forecasts as this data will inform them of whether a business predicts it will be successful or not.
Financial risks can be estimated through the use of forecasting techniques. If forecasts do not appear financially promising, financial risk is raised, and stakeholders could withdraw their investments. If the return on property is not in their favor.
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