Functions of Business Finance

  1. Initiating Business: Finance is the first and fore most requirement of every business. It is the starting point of every business, industrial project etc. Whether you start a sole proprietary concern, a partnership firm, a company or a charity institution, you need ample amount of finance. It is equally important for profit seeking and non-profit activities. It is equally important for a multinational organization and for a free dispensary.
  2. Purchase of Assets: Finance is needed to purchase all sorts of assets. Even if credit is available some down payment is to be made. Mostly finance is needed at the start of business for the purchase of fixed assets. These fixed assets consume a large amount of initial investment of the entrepreneur, so he may face liquidity difficulty in running day to day affairs of the business.
  3. Initial Losses: No business attains high profit on the first day of commencement. Some losses are normal before the business reaches its full capacity and generate enough revenue to match cost. Finance is necessary so that these initial losses can be sustained and business can be allowed to progress gradually.
  4. Professional Services: Certain business need services of specialized personnel. Such personnel have rich experience in specialized fields and they can provide useful guidance to make business profitable. Nevertheless these services are costly. Finance is always needed so that services of such professional consultants can be hired.
  5. Development: Business is always exposed to change. New innovations and emergence of new technologies replaces old techniques out of market. So in order to remain in the market, it is needed to keep the business well equipped with all emerging tools and techniques. This required finance. New technology is always expensive as it is better than others. So finance is needed to purchase new equipment and keep the business running.
  6. Information Technology: Information technology has now changed the geography of the business battle field. The home markets have now extended virtually to other comers of the world. The whole world can be your customer or competitor. To face such a fierce competition, IT is needed. Skills and competency in IT can perform miracles. But finance is again the decisive factor. It is very much needed to incorporate expensive IT products in the business.
  7. Media War: The advertisement and promotion have now become a vital elements for the success of business. The way a businessman approaches a customer and convinces him to purchase his product has become more important than the quality of product. With advertisement on International media, a businessman can reach the minds of millions of people around the globe. However, advertisement is a luxury which every business can’t afford. Huge finance is required to meet advertisement expenses.

Avoid Small Business Finances Nightmare

Keeping track of your profit and loss is absolutely necessary to maintaining the financial health of your business. Simply put, without reviewing your books every so often, you have no real way to tell if you’re even turning a profit, let alone if you’re in the red. In fact, a whopping 63% of small businesses don’t survive even six years due to financial neglect and limited financial training-and most work-at-home people fail before six months time!

Further attributing to these small business casualties is the reality that many of them do not have an accountant that understands online business expenses. All accountants are not created equal. While some might specialize in tax representation, others are well versed in the insurance industry. Think about it though, would these types of accountants know what an affiliate payment is, or how much of your bandwidth fees you can reasonably write off?

This aspect of running a business can be intimidating, but don’t be discouraged! This article will illustrate four very effective ways to help prevent losing your business to these common oversights. Please keep in mind that I am not a certified accountant, and that these are only my suggestions to help you maintain the financial aspect of your business.

Find an Accountant That You Can Work With

As mentioned previously, not every accountant is going to be a good match for your business. If you hire an accountant who has years of experience with brick-and-mortar businesses, they may not understand the costs of running an online business.

You could, in turn, pay more taxes at the end of the year because your accountant did not recognize the potential tax write-offs that an online small business could benefit from. Did you know that your home office tools just might qualify as a tax write-off? Your computer, your business telephone line, even the entire room could possibly be written off at the end of the year.

So how would you go about finding the best accountant for the job? Request some referrals from people that you trust, and set up a couple of interviews. One size does not fit all in this case, however. You’ll want to know a few things about your prospective accountant:

  • Experience – How long have they been working with online small businesses, and to what extent? Do they understand the difference between affiliate commissions and payroll?
  • Hypothetical situations – Write an in-depth list of palpable risks and possible hurdles that you expect your business to be subject to in the long run. Ask the accountant how they can prevent or even benefit from these scenarios. Let them demonstrate why you should hire them.
  • Expertise – This accountant is great at crunching the numbers, but can they help you plan your business? Provide helpful and readily applicable advice? A good accountant can accomplish all this and more.

Pay special attention to how the accountants present themselves, and especially how they address your questions and concerns. If the accountant is not receptive to your business concepts, they do not have a place on your financial team.

Ask Your Accountant to Help Advise Your Small Business, Sole Proprietor, or LLC

Additionally, your accountant is a valuable advisor to have when considering important business options. Not only can they set up your business records and books, but they can be indispensable when it comes to deciding whether or not to expand, whether or not to hire new employees, and providing you with a complete financial forecast.

Because your accountant maintains your business finances, they will be able to counsel you about the risks and benefits of forming an LLC, or remaining the sole proprietor. This is a big step for any small business, and your accountant would be best suited to aid you in making this decision.

Meet With Your Accountant Regularly

Your accountant is a great asset to your company, but you cannot maximize your financial potential if you do not meet with them regularly. I cannot stress enough the importance of this-schedule quarterly, if not monthly meetings with your accountant.

Your finances are of the utmost importance, therefore careful monitoring should not be put off until tax season. This is a common folly that could ultimately cost you your business! Your accountant may find ways to save you money on a frequent basis, not just around tax season.

Meeting with your accountant consistently can help you ensure that your accountant is handling your financial needs in an acceptable manner, and keep you abreast of every single detail on your financial horizon.

Business Finance for Growth

By obtaining finances from a specialist business bank, a company can get access to the additional resources that they need to fund growth. Such funding is structured, and repayments can be built into the expansion plan. This means that the company can manage its growth as effectively as possible and be able to achieve its long term goals more quickly.

The bank will want to know as much as possible about your overall plans, and you may be expected to provide security against the borrowing. For smaller firms, this may mean that the assets of the owner are used as collateral.

Obtaining business finance from a bank is a relatively straightforward process. The bank will want to know as much as possible about your business and your goals so that they can put together the best possible lending package to meet your needs. With this in mind, it is important when approaching your business bank about borrowing money that you are clear about what your goals are, and how you plan to achieve them.

Small Business Finance

Develop a business plan and loan package that has a well developed strategic plan, which in turn relates to realistic and believable financials. Before you can finance a business, a project, an expansion or an acquisition, you must develop precisely what your finance needs are.

Finance your business from a position of strength. As a business owner you show your confidence in the business by investing up to ten percent of your finance needs from your own coffers. The remaining twenty to thirty percent of your cash needs can come from private investors or venture capital. Remember, sweat equity is expected, but it is not a replacement for cash.

Depending on the valuation of your business and the risk involved, the private equity component will want on average a thirty to forty percent equity stake in your company for three to five years. Giving up this equity position in your company, yet maintaining clear majority ownership, will give you leverage in the remaining sixty percent of your finance needs.

The remaining finance can come in the form of long term debt, short term working capital, equipment finance and inventory finance. By having a strong cash position in your company, a variety of lenders will be available to you. It is advisable to hire an experienced commercial loan broker to do the finance “shopping” for you and present you with a variety of options. It is important at this juncture that you obtain finance that fits your business needs and structures, instead of trying to force your structure into a financial instrument not ideally suited for your operations.

Having a strong cash position in your company, the additional debt financing will not put an undue strain on your cash flow. Sixty percent debt is a healthy. Debt finance can come in the form of unsecured finance, such as short-term debt, line of credit financing and long term debt. Unsecured debt is typically called cash flow finance and requires credit worthiness. Debt finance can also come in the form of secured or asset based finance, which can include accounts receivable, inventory, equipment, real estate, personal assets, letter of credit, and government guaranteed finance. A customized mix of unsecured and secured debt, designed specifically around your company’s financial needs, is the advantage of having a strong cash position.

The cash flow statement is an important financial in tracking the effects of certain types of finance. It is critical to have a firm handle on your monthly cash flow, along with the control and planning structure of a financial budget, to successfully plan and monitor your company’s finance.

Your finance plan is a result and part of your strategic planning process. You need to be careful in matching your cash needs with your cash goals. Using short term capital for long term growth and vice versa is a no-no. Violating the matching rule can bring about high risk levels in the interest rate, re-finance possibilities and operational independence. Some deviation from this age old rule is permissible. For instance, if you have a long term need for working capital, then a permanent capital need may be warranted. Another good finance strategy is having contingency capital on hand for freeing up your working capital needs and providing maximum flexibility. For example, you can use a line of credit to get into an opportunity that quickly arises and then arrange for cheaper, better suited, long term finance subsequently, planning all of this upfront with a lender.

Creative Business Financing Techniques

Peer-to-peer lending is exactly what it sounds like-one person lending money to another. There are several web sites out there that cut through all the red tape of the banking system, allowing more people to receive the small amounts of funding they need. Prosper.com is an excellent example. The website serves as a digital loan marketplace, where multiple lenders offer bids and compete (think eBay) to fund members who need loans. Once acceptable terms are reached, the debtor receives their funding, and Prosper handles all administrative tasks. The creditors’ outstanding loan assets can then be traded as securities through the company’s marketplace. These features are what make Prosper an excellent option for companies who need small amounts of funding.

Another possible source of small business financing through peer-to-peer lending is LendingClub.com. A similar model is used on this site as well-by introducing more competition on the lender’s side, consumers are able to receive lower rates on their loans. Conversely, these websites are also investment opportunities for people who would like to provide financing for others.

These two sites primarily focus on lending to people in the United States. However, they’re a part of a larger global trend toward microfinance. Microfinance is the practice of giving very small loans to entrepreneurs who would otherwise be unable to get loans in the traditional banking system. This trend is particularly focused on lending to entrepreneurs in developing nations. Sites such as Kiva.com operate by lending money to small businesses and tradespeople for the purpose of long-term poverty relief. It is funded by individual lenders and offers loans as small as a few hundred dollars.