The role of finance in business is indispensable. Business owners use financial data every day when making decisions. They use finance to analyze the present and project the future. Companies cannot operate without the benefits of financial analysis.
Strategic Planning and Budgeting
You wouldn’t load the family in a car and head out for a vacation without having a map to your destination, would you? It’s the same with your business. You define where you want the business to go, determine the objectives and then ask your financial people how much it will cost to get there. These plans form the basis for hiring employees, capital spending, raising capital, marketing campaigns, and bonuses for management.
Equity or Loan?
After creating the strategic plan, the finances turn to the methods of funding a company’s operations. Is it better to raise more equity capital from investors or take out loans from lenders? The financial analysis gives the answer to this question.
Cash Flow Management
Who’s keeping up with the cash? The finance people are. A small business owner always wants to know how much money is in the company’s bank account. It’s the job of financial managers to make sure the business has enough liquidity to pay its suppliers and employee on time. If cash is getting tight, the people in finance will make arrangements to use the firm’s bank line of credit.
Conversely, having excess cash sitting idle in a bank account is a drag on a company’s return on investment. Financial analysis will spot this situation and will find investments that produce a better return.
Profit Planning and Cost Controls
Since the basis of a business is to make a profit, it only makes sense that finance would play a major role in finding ways to improve profitability. This might involve determining the profitability of individual products and weeding out the losers and promoting the winners. Finance could point out ways to improve productivity in manufacturing or find cheaper sources of materials.
Small business owners are constantly reviewing their financial statements, looking for any expenses that suddenly get out of line with the budgets. This is financial management by exception. If everything is in line with the profit plan, no problem. If not, then it needs the attention of managers to correct the deviations.
Managing Unavoidable Risks
Managing a business is risky, right? An owner has concerns about the direction of interest rates, currency fluctuations, changes in commodity prices, and risks that his customers will not pay their invoices. Financial reports monitor these areas and give reports to owners and managers.
Financial management analyzes the risks of international markets, checks the credit standing of customers, goes through the terms of loans from lenders, and provides an assessment of the perils in these areas. Nothing is ever for certain, and finance helps put the hazards in perspective.