The primary goal of any corporate firm is to benefit from the business’s finances while operating at its maximum capacity. Understanding and analyzing your organization’s financial situation, industry, and economy is the key to running a successful business. The more knowledgeable you are regarding your business activities and their correlation with the financial aspects, the better. However, financial management can be the least exciting and quite monotonous task for running a business.
Entrepreneurs often feel like spending too much time sorting out the finances can lead to a halt in developing innovative ideas for the growth of the business. Many owners avoid checking the finances and focus on more fun aspects of the company. But it is a grave mistake because even if you feel like your business is excelling in all the areas, you need to know how it is operating financially. So, let’s take a look at some of how one can understand finance for a more robust business foundation:
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Financial Goals
The first and foremost step behind completely understanding the logic behind financing is setting a SMART financial goal. It should be specific, measurable, achievable, realistic, and time-specific so that you can form the basis of your financial year. Every sustainable business needs a holistic view of its financial stability, and setting objectives can help you with that. But it requires excellent decision-making skills and strategic knowledge to develop financial goals for your company. It would be best to hire a professional finance manager or accountant to do that for your organization. It would be helpful if you encourage your accounting and finance department to expand their educational expertise. They can opt for comparatively easier courses like online masters in accounting to help understand the financial management dynamics.
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Annual Budget
Budgeting is an essential part of successful financial management and planning for any organization. A detailed, comprehensive, and realistic budget can help you structure the frameworks of your business’s economic activities. You and your staff will be more aware of their limitations and operate within the means, maintaining healthy cashflows. To understand the budget better, we suggest that you, as the owner, spend a few hours each week going through the operational expenses and turnover to measure the performance against set benchmarks. Comparing your current sales, expenditure, and cost of production to the budgeted one will give you an insight into the fiscal condition of your company. It would allow you to understand when and where you’re underspending or overspending. Some useful technological tools can help you in properly categorizing your business expenses and in tracking them daily, making the work more accessible and less manual.
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Income Statement
You may be familiar with the alternate term of the income statement, ‘profit and loss statement,’ which makes it more self-explanatory. It is simply the primary and most important financial statement for any business. It highlights the revenues and expenses that lead to profit and loss over a month or a fiscal year. Analytically, you can deduce your company’s profitability through an income statement and see what’s causing low profits or losses. It lets you know whether your business operations are sustainable or do they need amendments. It enables you to learn more about your expenditure and find ways to lower it down. Other than this, it gives you insight into your sales trends, allowing you to see when a business is making the best of its revenue.
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Statement of Financial Position
Statement of financial position is an old name for Balance Sheet, which is the best way to summarize the three most important aspects of the accounting equation – your company’s assets, liabilities, and capital. The first section of the balance sheet is dedicated to the help of your organization, current and non-current. Current ones are the ones you can quickly liquidate, like bank balance, account receivables, and inventory. In contrast, non-current ones are the fixed assets like vehicles, land, or goodwill.
The following section is for liabilities, listing down all the debts, loans, and account payables of your organization. The last one is for your company’s equity, taking into account the incoming capital as well as the drawings of the owner. To complete the financial equation, your assets must be equal to the sum of your company’s liabilities and capital.
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Statement of Cashflow
The last essential financial statement is the statement of cash flows; it lets you analyze the inflows and outflows of cash in your organization, highlighting the details of the cash-on-hand. It is dissimilar to the profit and loss statement because it doesn’t include non-cash expenses like depreciation. With the help of a cash flow statement, you will be able to track the money you’re utilizing in your day-to-day business operations and help sustain the business better. It will allow you to understand whether investing in growth is a better option or your expenses need more control.
Conclusively, understanding your business finance helps you become better at making prompt decisions and improving organization performance. Financial management enables you to become more proactive and seize market opportunities as they come. All of this is highly conducive to leading your business towards success, sustainability, and certainty.
