Finance is a business function that uses numbers and analytical tools to help managers make better decisions. Every business owner must learn at least basic finance principles to effectively run his company. Finance helps management gain a clear understanding of the company’s current financial position, particularly whether the business is profitable or not. Companies of all sizes benefit from thorough financial planning to guide the business steadily down the path to future growth.
Forecasting And Planning
During the planning process, management determines numerical goals for the upcoming 12 months, or in the case of a long-range plan, for three years or more. Company management then maps out the actions that need to be taken, and the timeframe, for the goals to be reached. Finance comes into play when the action steps are converted to forecast numbers for revenues and expenses. Managers with financial planning expertise are able to create forecasts that are attainable yet aggressive. They must also have sufficient understanding about company operations to build spreadsheet financial models based on assumptions that are realistic.
Accounting And Measuring Results
Accounting is the branch of finance responsible for recording financial data and generating financial statements that show the company’s operating results, as well as other critical functions such as tax compliance. Accounting has its own set of rules and standards for the recording of financial information and the presentation of results, called Generally Accepted Accounting Principles, or GAAP. Strict compliance with the standards allows company management to be assured the statements they receive are complete and accurate. Finance goes one step further and interprets the results. Variance analysis is done to compare actual results to forecast and uncover the reasons for negative or positive deviations. Finance staff members compare the company’s financial results to those of other companies in the industry to see whether the company is performing above or below average, compared with its peers.
Monitoring Cash Position
All businesses, particularly smaller ones that do not have large cash reserves or borrowing capacity, must always keep an eye on their cash position -- the inflows and outflows of cash. The finance department is charged with forecasting cash flow to prevent potentially disruptive shortages of cash. In a small company this can mean serious problems, such as not being able to pay employees at the end of the week. Investing surplus cash to achieve a maximum return is also part of the finance function. In larger companies these investment activities take place on a daily basis and involve constant monitoring of the financial markets to select the best investments for such things as the company’s employee retirement plan.
Analysis for Decision Making
Finance can be likened to a toolbox for company management to use. The tools help answer questions that management must address when making small and large decisions. A small decision might be whether to lease or buy a new copy machine. A large decision for which finance provides guidance could be whether to acquire a competitor in order to grow the company more quickly. The goal of the data gathering and sometimes complex financial modeling utilized in finance is to ensure the company makes the most efficient use of its finite resources, including the capital, human resources and productive capacity.
- "Financial Management 101: Get a Grip on Your Business Numbers"; Angie Mohr; 2007
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