Definition of Business Finance

by Madison Garcia; Updated September 26, 2017

Business finance is the management of company capital. Individuals working in business finance seek viable sources of capital for a company, manage it so that the company performs well and report the financial information to company stakeholders.

Business Financing

In the business field, financing refers to the way a company obtains capital to expand operations and purchase assets. There are two main forms of business financing: debt and equity. Debtors, like banks, bondholders and other lenders, lend a company money for a period of time. In return for the capital, the company promises to repay a certain amount of cash either in installments or in a lump sum at the end of the loan term. The business may also make periodic interest payments on the loan.

Tips

  • Credit cards are another form of short-term debt financing used by small businesses. Business News Daily notes that while credit cards are a convenient form of financing, it's easy to spend more than you can pay back and the debt should be paid off quickly.

Alternatively, investors can issue a company capital in exchange for equity in the company. When an investor has equity, it means he owns part of the company. The first investor in a business often is the business owner, who may invest his own money into the business. When the company does well, the value of the equity increases, so the investor has an incentive to see the business succeed. The business may also issue dividends to equity holders.

Business Finance Departments and Divisions

Within business finance, there are many divisions, each with distinct roles and responsibilities. Business finance roles include:

  • Treasury is responsible for tracking cash flow and issuing payments so the company has enough money to meet its day-to-day obligations. Depending on how the business is structured, treasury also may manage capital fund raising, investment allocations and bank relations.
  • Financial Reporting generates and analyzes financial statements for managers and external parties.
  • Corporate Development makes decisions regarding business acquisitions, mergers and joint ventures.
  • Capital Planning analyzes the profitability of capital expenditures and large projects.
  • Internal Audit reviews and suggests improvements for operational and financial controls.
  • Tax ensures compliance with tax laws and structures transactions to avoid excess tax liability.

Create and Manage Growth

Some of business finance, like corporate development, treasury and capital budgeting, focus on creating sustainable growth for a company. Individuals in these positions need to have a strong understanding of financial risk, diversification and the time value of money in order to make the best possible decisions on how to allocate company resources.

Monitor and Report on Financial Health

Other parts of business finance, like financial reporting and some treasury roles, are dedicated to helping managers and investors understand business performance and monitor the company's financial health. Individuals who work in financial reporting need to be well-versed in accounting theory, including budgeting and forecasting, in order to help interpret a company's financial results.

Ensure Financial Compliance

Much of business finance also is focused around compliance. Tax, financial reporting and internal audit functions are all responsible for ensuring that a company complies with financial and operational rules and regulations set by governmental entites. Individuals in these positions need to have up-to-date knowledge of the tax code, generally accepted accounting principles and financial regulations such as the Dodd-Frank Act and Sarbanes-Oxley.

About the Author

Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.