Business finance is about planning, organizing, directing and controlling financial activities to attain business goals. It is the spine of a commercial entity, as no business can run without business finance.

Business finance involves the management of all the commercial resources, assets, and even human resources to attain financial goals.

Role of business finance in a business

One straightforward fact is business finance helps a commercial entity earn and manage money. However, there are many more aspects that authenticate the significance of business finance.

Resources allocation – Business finance ensures that a business allocates all its resources, ensuring their maximum use. It includes the allocation of personnel and assets and funding daily operations. The prime purpose of resource allocation is to avoid waste of time and money. All efforts focus on making business operations more efficient and effortless.

Risk management – It is not an exaggeration to say that risk management is the primary task of business finance. After all, all financial activities are programmed to mitigate risk and improve efficiency. This includes creating an emergency fund, taking relevant insurance premiums and creating financial reserves. The better you manage risk, the stronger the business finances.

Debt management – Of course, debt management is an important aspect of business finance. After all, a business with unmanageable debts cannot grow and may even collapse. However, debt management is not only about paying off debts; it is also about knowing the best deals. For example, what are the best short-term loans available in the lending market, and what’s the current rate of working capital?

What are the major sources of business finance?

For the purpose of managing business finance, you need to have funds. Right? Where can a business get its funds from? Well, there are sources that facilitate funds for a business. This is where a commercial organization needs business finance.

• Equity finance – this type of financing includes selling a percentage of shares to investors. However, the investors share not only the profit but also the loss. Imagine a company that fails to stay stable and faces loss. Its investors, too, can’t fetch profit if the company does not have profit.
• Internal sources – These are the business-earned profits that the owner can reinvest in the business. Also, the business owner can invest personal savings. However, such sources can be supportive but not sufficient for a large-scale requirement. For that, you may need to look for other finance sources.
• External sources – The funding sources outside the business are called external sources. They include loan options, government grants, external partners, etc. However, these sources include options with terms and conditions and may include repayments.

Pitfalls of business finance

Managing business finances is not a cakewalk. Despite all efforts to invest, sometimes things go wrong. There are some pitfalls of business finance you should be aware of.

• Not paying attention to cash flow – Poor cash flow is the first thing that makes you realize the weakness of your business finances. It immediately affects daily operations. If you are not paying attention to it, you may need to regret it soon. It is better to always have a strategy ready to fix cash flow issues.
• Not maintaining a budget – A business needs budgeting every single day and month. If you are careless on this part, you may fall prey to money crisis and other financial threats. It is a must that you make a budget and also follow it. After all, you should know where you spend your money. It helps spot the necessary expenses.
• Not reinvesting profits – Reinvesting profits is vital for consistent business growth. If you skip this part, you are making a big mistake. In other words, it can be called financial suicide. Spending profit impulsively proves a big pitfall for business finances. Make wise decisions, take rational actions, and wisely reinvest profit only in your business.
• Overplanning things is never right – You must have heard excess of everything is bad. When you over-plan expenses, you may be disappointed. Over-planning denotes a situation where you plan expenses penny by penny. But don’t forget that unforeseen expenses are always there; thus, never overplan and keep an additional account with some extra funds.
• Getting overconfident when things are fine – It is human nature to be careless when things are going well. But you need to understand one thing. Always review revenue and manage expenses. These are the basics of good business finance management. Always keep an eye on the numbers as they give necessary insight into things.

Tips for smart business finance management

When you know how fragile it can be to manage business finances, it is time to work on some good tips. Now that you know the pitfalls, it is easier to know the ways that can help avoid them.

• Understand the actual financial needs of the business

You need to know what exactly is the financial need of your business?  Whether it is a start-up or an established brand, every business has its individualistic needs. This includes short-term as well as long-term goals, working capital requirements, etc. The more you know about your expenses, the better you can manage business finances.

• Monitor cash flow

Keep an eye on your cash flow, as that helps to know the intricacies of income and expenses. It makes you better at money management. In fact, gradually, you learn to make necessary improvements. The more aware you are about your cash flow, the smoother the business finances. You will learn to manage expenses and spot the ones that are unnecessary.

• Prepare a comprehensive budget

Budget preparation is necessary to keep an eye on income and expenses. It helps you determine money allocation. You can spot the aspects where you are overspending. Easily meet the goals of cost-cutting, as when you spend wisely, you can easily notice unnecessary expenses. The moment you lose control over budgeting, your business finances derail. Do not let it happen to your company. Budgeting is the foundation of a successful business.

• Keep a financial cushion ready

Financial circumstances can be unpredictable sometimes. In such a situation, you should have a backup plan. Whether it is about keeping an emergency fund or having a strong crisis management strategy, be ready. You may have a good cash flow, and you may be earning good profit, but not having a financial cushion is foolish. After all, money is the most volatile thing in the human world. It is sometimes available in abundance and sometimes leaves you instantly. Keep an emergency fund, and don’t let it go empty.

• Do not overlook small debts

Small debts, if not taken care of in a timely manner, can turn into a debt trap. Usually, business owners blame their multiple short-term loans for their fractured finances. But if you don’t repay the debts on time, it will obviously turn into a nightmare. Also, if you are taking multiple loans for every small need, it is just a bad habit. Always try to manage expenses from available financial resources. In business, even small expenses can take a huge shape if they multiply in number or happen in recurrence.

Conclusion

The above information about business finance ensures you get to know all its basics. After all, it is the backbone of business finances. If you want your business to be safe and stable, always pay attention to the basics.

Here are some conclusions –

• Smart money management comes with time and experience. But you should keep working on the basic technicalities of business finances.
• Always learn from your past mistakes. A business is like a child. Its future completely depends on your financial decisions.
• Never underestimate the small expenses. They can be monstrous in size if you calculate them in totality.

Always have a backup plan for unforeseen financial circumstances. Many times, emergency plans work as the game changer.