Irrespective of their size, scope and sector, all business organizations need accounting systems. This makes finance one of four core business functions.
Good understanding of published accounts helps managers to keep correct financial records, analyze financial information and assess the performance of a business. Accounting information is used for strategic decision making. And to evaluate business investment projects in financial terms.
But, it is not enough to use only numbers to understand the business. In addition to quantitative methods, using qualitative methods is necessary when talking about financial information and decisions.
Qualitative approach to finance can help with an understanding of how financial information can be used to add value, promote profit maximization for the owners and improve control in business organizations. Good financial health of a business may significantly influence its strategic decisions, ethical considerations and the need for change.
All in all, finance transcends numbers and connects them with other business functions such as marketing, Human Resources (HR) and production.
1. Needs for Business Finance
At the beginning, the finance section covers the need for finance – to start the business, to run the business on daily basis and to grow the business in the future.
2. Sources of Finance
Sources of finance of a business can be both internal and external. They can also be classified as short-term finance, medium-term finance and long-term finance.
3. Costs and Revenues
This part includes the classification of different types of business costs such as Fixed Costs (FC), Variable Costs (VC) and Semi-Variable Costs (SVC). Another approach of looking at costs is in terms of manufacturing products. Direct costs are expenses that apply to one business activity, or producing one product. Indirect costs are expenses that apply to more than one business activity.
4. Break-Even Analysis
The Break-Even Analysis shows how many units of a product must be sold to cover both Fixed Costs (FC) and Variable Costs (VC) of production in order to start making profit.
5. Final Accounts – Profit and Loss Account
All business organizations represent themselves through the common language – numerically in financial statements. Two financial statements that all businesses around the world use include Profit and Loss Account (P&L Account) as well as Balance Sheet.
Profit and Loss Account (P&L Account) shows the outcome of business activities during an accounting period (usually one year) reflecting whether the business made profit or generate loss.
6. Final Accounts – Balance Sheet
Balance Sheet, the second financial statement, shows the financial position of the business in terms of the assets and liabilities that the business owns at the end of the accounting.
7. Ratio Analysis
Ratio Analysis, the analysis of those two financial statements, explains why and how accounts are used and shows the meaning of these final accounts by calculating various ratios (Profitability Ratios, Liquidity Ratios, Efficiency Ratios, Debt Ratios, and Investor Ratios). Then, the results need to be interpreted.
8. Cash Flow
Calculating working capital and Cash Flow forecasting are applied to practical situations as there is a need in almost every business to solve cash problems.
9. Budgeting
Business managers also do budgeting. This is a process of projection of sales revenue and costs in respect of near future years
10. Investment Appraisal
Finance also covers the topic of Investment Appraisal, a managerial decision-making method used to classify the attractiveness of an investment.
