Business finance is a tool that encompasses a large portion of management activities. Finance provides owners and managers with mathematical and statistical formulas to assess their companies' effectiveness and efficiency. Many businesses use finance tools that allow owners and managers access to time-tested management techniques for improving their companies' operations.
Starting a company often requires business owners to secure financing. Business finance allows the owner to estimate his startup expenses and the first few months of business expenses. Many owners use a business plan to outline these expenditures. Business finance provides tools and calculations to determine the best way to approach startup financing. The owner can take this information to his local bank and request a loan for starting his business. As an alternative, the owner may find a venture capitalist to secure equity financing. A business plan improves the chance of securing external financing because lenders and investors do not often give money to entrepreneurs who cannot back up their vision with numbers.
Budgets are a common finance tool in business. Business owners use budgets to create road maps for their companies' future expenditures. Manufacturing and production companies use budgets to track variances from their production processes. Variances can indicate companies are spending more or less money on production. Business finance allows owners and managers to assess the variances and determine if they are favorable or unfavorable.
Established companies use business finance to create a capital structure. Capital structure is the amount of debt and equity financing a business has. Business owners commonly use finance to pay for expanded operations or pursue new opportunities. Rather than spending precious working capital on these items, owners will secure external financing. They usually prefer to limit the amount of debt in their businesses. High debt levels increase cash outflows and may require collateral.
Financial analysis allows business owners to use quantitative methods to measure a company’s performance. Business finance formulas help owners and managers measure cash inflows, return on major investments and the amount of time needed to earn back spent capital. Owners and managers also can create benchmarks to review against past performance or the industry standard.