Business finance is the acquisition of funds by a business to finance its overall activities. Financial management, on the other hand, involves decisions made on acquisition and use of the finances. Without proper financial management hard earned resources are vulnerable to wastage or misappropriation by staff. Therefore, if any enterprise is to succeed and operate into the long-term, they should know how to manage business finance. Business finance management can be divided into sources of funding and allocation of resources.
Sources of Funding
These are the avenues from which the business gets it’s capital. It involves the debt to equity policy of the business, determined by the business’ objectives. Debt can be sought through borrowing from banks while equity is acquired by issuing shares to the public. When using debt factors such as the cost of capital should be considered, high-interest rates reduce the profitability of a business.
When using equity, a business should have a clear ownership and dividend policy to maximize shareholders’ interests. Many businesses prefer higher debt than equity because using debt produces more profit by reducing the tax liability of a business. The issue of bonds is also another means by which capitals can be raised.
Allocation of Resources
Businesses have many needs but limited resources, hence prudence should be applied when distributing finances to the needs of the firm. Management needs to decide which projects to invest in, depending on the risk and returns accompanying each project a process called capital budgeting. Working capital management is also key, as inventory and cash are constantly being paid and received in and out of the business. It is vital that a business protects its assets and limits the level of liabilities it has Resources can be used to acquire more assets to help the business produce more, or pay its liabilities on time
Every business should be vigilant on how it manages its finances; this helps reduce cases of bankruptcy, fraud or theft leading to winding up of a firm’s activities.
If any business is in crisis on how to manage business finances, the best advice would be to hire or seek consult from a trained accountant. Accountants have extensive knowledge of business affairs extending beyond only keeping accounting books. They trained on capital budgeting techniques, tax policy, financial modelling and business valuation. An accounting or financial professional would be able to manage business finances efficiently, leaving management free to take on administrative duties.