In general, a business’ success and sustainability depend on money. Adequate financial resources allow entrepreneurs to start, run, and expand their businesses. Hence, the goals of a company are anchored on profitability and cost reduction.
While a company’s vision empowers its people to perform, business finance is what sets a business apart from its competitors. A study revealed that 543,000 new businesses start every month, which reaches up to 6.5 million per year. The business landscape has been continuously evolving; thus, competition among entrepreneurs become even tighter. Proper management of business finance and execution of strategies propel a business to gain ground.
Defining Financial Needs
Whether you’re a startup or a large corporation, you always need money to keep the business going. These are the fundamental financial needs of every business.
These are the funds that buy fixed assets, including land, buildings, and equipment. These are assets that generate income for an extended time. The amount of a fixed capital varies depending on the business’ size and functions.
Working capital is funds that acquire short-term and current assets, which include employee salary, rent, bills, marketing, etc. The needs for these assets occur at short intervals. Also known as circulating capital, these funds are recovered through cash realization.
This capital involves money that is invested in activities that sustain the basic needs of a business’ daily operations. These usually occur in two to five years. Examples are building renovation, updating of equipment and machinery, large-scale advertising expenditure, etc.
Ownership Capital (Permanent Capital)
It is the capital investment of a business owner. The amount of capital determines the level of an owner’s or a stakeholder’s profit entitlement. This capital may come from individual savings, mutual agreement with partners, or investors’ contribution. The return on investment depends on the overall profits of the business.
Loans often satisfy the financial requirements of a business. Entrepreneurs borrow money, either for short-term or long-term, to secure the business’ existing assets. Loans constitute a requirement to pay interests and repay the principal amount.
Importance of Business Finance
A business’s financial needs depend on the present conditions of the market and the overall performance of the company.
- Financial resources are needed to start a business. An entrepreneur always uses the money to purchase all assets, employ people, and running costs.
- Businesses need finances to expand production capacity, which, in turn, increases business profitability. Money can buy new technologies that can increase the efficiency of daily operations.
- Financial resources develop new products. In the fast-changing market, product updates enable a business to win over competitors and gain profits by attracting new customers.
- Money induces expansion by allowing businesses to acquire other companies.
Why Cash Flow is Essential in Businesses
Cash is always crucial in all businesses. While revenue and income are essential in business, the ability to generate money determines a business’s long-term success. Specifically, here are some advantages of having cash on hand.
- Provides an efficient way of bill payments
- Generates capital investments
- Allows company acquisition
- Prepares the company for down economies
- Reduces transaction costs
- Rewards shareholders through dividends and repurchases
Finances allow businesses to take advantage of growth opportunities. Financial resources run and sustain all business operations. Investment in proper financial management guarantees a business’s profitability and overall positive performance.