Key parts of business finance

Business owners rarely go into business to deal with financial aspects of managing a company. It happens because they are most likely passionate about a product or service they provide and want to devote their whole time to it. Thus, their financial duties usually remain in the background. However, it is necessary for the longevity of business that an owner understands some of the financial fundamentals.

When you start a small business, you soon realize that things do not happen in the real world the way they tell you in business textbooks: invoices are not paid in time, profits are not always there, ads do not consistently bring in customers and sales do not tend to increase. Every business, no matter if it is big or small, has to face many financial issues from finding a start-up capital to resolving cash flow problems.

You do not have to be an accountant or financial specialist, but it is important that entrepreneurs have some key skills to assess financial aspects of the business and take sound decisions as to running business finance in a profitable direction. Even if you have to apply to business process management companies for the support, you have to be sure to understand the financial information about your company as well as be aware of whether your business eligible and qualifies for loans. A business owner is to remember: accounting is something more than only about taxes. There is so much more to know about the numbers; thus, you will know your business is going in a perspective direction.

There is a number of key parts of the business finance that you need to know, and they can be outlined and based on the three critical financial statements the business generates: a profit/loss, a cash flow and a balance sheet. The business finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks, entailed in their projects. The business finance incorporates the study of money and other assets, the management of those assets, profiling and managing project risks.

Some entrepreneurs have a deceptive opinion they are making money because they have money on their accounts. Certainly, it cannot show that the business is prospering. Having money on a checking account does not mean the business is profitable. It could mean you have not paid all your bills; hence, you still have a little cash on hand. Nevertheless, cash and profit are two different concepts. If your business is not profitable, it will not have a long-term success. It is very important to understand the difference between profit and cash to objectively assess the financial picture of the business.

Frequently, small business owners do not clearly distinguish the concepts of cash and profit. As a result, they cannot effectively manage their business finance and give a sound explanation of any outcomes from financial reporting. A business can bring profit and still show a negative cash flow. This can happen, for instance, if your loan payments are taking more cash out of your business than you have a profit. The same is true on the opposite side of the flow: you can have a lot of cash coming into your business through an increase in personal or lender-financed activities and yet not to show a profit, since you are not generating enough revenue. The concepts of profit/loss and cash flow provide two very different views of the business; that is the reason why the importance of catching this difference is critical for business perspective.

The third key part of the financial picture you should review monthly is the balance sheet. The balance sheet grants information on your assets, liabilities and equity. Assets are what you own, that is of a value, such as your bank accounts, inventory, equipment, property, accounts receivable. Liabilities represent your obligations to the others and include such things as accounts payable, notes payable to lenders and loans from shareholders. The equity balance reflects the value of your ownership in your business. When you take the value of your assets less the value of your liabilities, the remainder is your equity.

The size of the business does not matter - profitability and ongoing financial stability are something that should be monitored on a regular monthly basis. Companies today are faced with some pressure from corporate executives, stockholders and competitors to achieve more with less- more revenues, more profitability and more productivity from all departments. Few companies have the ability to effectively manage their disparate business systems - such as enterprise resource planning, customer relationship management, human resource management systems.

In addition, companies must examine their business processes to identify and eliminate bottlenecks in order to gain a maximum operational performance. In this case the support of business process management companies is invaluable, for in some cases only professionals can help organizations easily identify and eliminate extraneous processes, reduce operational costs, and increase employee productivity - ultimately resulting in a direct and positive impact on the business processes.

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