There are many reasons to understand and evaluate the financial aspects of a business. For owners and executives, understanding the financial aspects is essential to making good decisions going forward. Potential investors may also care about a company's financial aspects as a means of gaining knowledge to help predict future performance.
For new business still in the process of establishing themselves and beginning operations, one of the most important aspects is commencement capital. This refers to the money that ownership has acquired to build the business. Commencement capital may come from investors, loans or be supplied by the owners themselves. In any case, the commencement capital needs to be sufficient to purchase all of the necessities to start operating and sustaining the business until it can begin to earn money.
Earnings and Expenses
A business's earnings and expenses refer to income and payments. These financial aspects can be measured from past data or predicted for the future using a variety of accounting methods. Earnings exceeding payments in a given period are called profits.
A business's assets include any tangible items of value: inventory or merchandise, real estate, cash reserves and other property, such as company cars and office equipment. Because they can be sold or used as collateral on a loan, assets are important for every business. However, a business with large assets may not be investing healthily in the future, indicating potential growth problems.
A company's debt is a very important part of its financial situation. Loans taken for startup procedures, to invest in improvements or purchase supplies are essential, but need to be paid off in a reasonable amount of time before interest costs run out of control.
Cash flow is another important financial aspect which can be difficult to measure and understand. It refers to the timing and rate a business makes and spends money. For example, stock dividends and other payments may only occur once a year, but the business must have enough cash on hand to make these payments. Earnings need to be distributed over time in order to supply a steady cash flow to meet payroll costs and other financial obligations, such as interest and payments on any debts. A business with strong earnings but poor cash flow may have unexpected difficulty meeting its financial obligations.
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