Finance is one of the critical functions of any organization. The business needs finance to run each aspect of its operations. Businesses need money for everything they do, from producing inventory and hiring employees to sales and advertising. The availability of finance and the ability to manage it effectively is essential for any business.
The finance department ensures the business has enough money to keep its day-to-day operations running. Moreover, it also makes sure the organization is making sound investments to secure its future. Sound financial management allows the business to take advantage of growth opportunities while formulating suitable strategies to overcome economic challenges.
Here are some of the main reasons why finance is essential for today’s businesses:
1. PROVIDING START-UP CAPITAL
A successful business venture starts with a great business idea. But this idea can only come to life when the entrepreneur has access to funds. Start-up capital is needed to purchase assets and machinery, produce inventory, and introduce the market product. Moreover, it helps cover the initial operating expenses until the business can generate enough revenue to breakeven. The entrepreneur must accurately estimate the amount of start-up capital they need and develop an attractive business plan to encourage investors to provide funding for their business idea.
Financial planning is often difficult for entrepreneurs who lack technical knowledge. Fortunately, many online programs are available today that allow you to brush up on your financial experience at a pace that suits you. From short-term diplomas to online masters in accounting, business owners who wish to learn accounting and finance have several options to choose to a better way forward.
2. MAKING A PROFIT
The majority of organizations today operate to make a profit. Financial management is about managing the organization’s money to ensure the achievement of this objective. Financial managers make sure that the business is profitable and its profits increase with time. It involves diligently managing the business’s capital investment by selecting the right finance sources and maintaining an appropriate balance between debt and equity financing.
Moreover, profit planning is about evaluating the profitability of the business’s different products/services to invest further in its most profitable segments while getting rid of the loss-makers. It also means keeping a check and balance on expenditure to reduce unnecessary spending.
3. ENSURING SOUND CASHFLOW MANAGEMENT
For long-term success, a business needs to be profitable. But in the short-term, liquidity determines the survival or failure of a business. Any company needs sufficient cash in hand to run its day-to-day operations. Without it, the business may fail to source raw materials, pay its bills, employees, and suppliers on time, and become insolvent in severe cases.
Sound cash flow management ensures the business manages its cash inflows and outflows, so cash shortage may not bring operations to a halt.
4. BUSINESS EXPANSION
All businesses wish to grow and expand with time. Growth allows a company to explore new markets and develop innovative products for their customers. However, all forms of development require funds. Suppose the business plans to introduce a new product into the market. In that case, it will need money for research and testing purposes and production, marketing, and advertising alternatively, if it plans to enter a new market. In that case, it will need funds to set up its premises in a new location, hire staff, and market its product to a new set of customers. In such situations, intelligent financial planning is necessary to make the new business segment a successful and profitable one.
5. ACHIEVING FINANCIAL GOALS
No business operates without a goal. Every business owner has a vision of seeing their venture in the next five to ten years. Over time, the organization must make progress towards its long-term goals.
The finance department ensures that the business heads in the right direction to achieving its financial goals. It makes sure appropriate funding is available to implement the strategic plans and keeps a check and balance on financial performance to ensure it stays in line with targets.
6. MANAGING FINANCIAL RISKS
Every business is exposed to various risks, regardless of its size and industry. Financial management ensures the company has a contingency plan to manage its risks. It involves identifying any threats to the revenue, capital, and savings of the business and creating strategies to minimize losses.
7. REPORTING OF PERFORMANCE
Businesses do not exist in a vacuum. They have stakeholders who wish to know the company is performing over time. The business must provide reports of its performance to these stakeholders periodically.
Shareholders want to know about the profitability so that they can determine the return on their investments. The government needs financial reports to collect taxes. Similarly, the management needs reports on the performance of each segment of the business for decision-making. The finance department ensures the company meets its reporting requirements by producing the information required by each of these stakeholders.
THE BOTTOM LINE
There is no denying the fact that financial management can either make or break a business. From ensuring sufficient liquidity on a day-to-day basis to achieve long-term profitability goals, the finance department has an integral role in any organization. Without an experienced team of professionals taking care of its financial affairs, a business cannot survive or thrive in the long run.
