When we talk about running a business, entrepreneurs care about nothing but profits. They want the company to thrive, grow, and earn hefty amounts of profits. And that only becomes possible when they manage finances effectively. From monitoring expenses to making debt repayments, you have to stay on top of all money-related matters. Having a keen understanding of the company’s financial position will help you make more apt business decisions.
Typically, the role of finance is two-fold. First, it helps in tracking expenses, paying bills, and budgeting. Second, it helps the business in profit maximization. For instance, analysts look for investment opportunities to expand income sources. Likewise, they optimize funding options to ensure business owners don’t have to incur additional interest payments. Effective financial management can go a long way in improving strategic planning and decision-making.
If you aren’t familiar with this, keep reading. Here we are discussing the role of finance in business decision-making and financial planning.
1. Fosters Asset Management
Usually, companies invest in costly assets while starting the business but struggle to manage them in the long run. As a result, their decisions don’t turn out as promising. Perhaps, you might decide to depreciate land by diminishing the balance method. But, in addition to reducing the value of tangible assets, it will create problems with revaluation. Hence, if you are new to the financial world, feel free to learn the ropes. From short courses to educational webinars – there are plenty of learning opportunities.
However, if you already have a bachelor’s degree, opting for higher education is the way to go. Fortunately, you can also do that with a good internet connection and a laptop instead of going to a campus. Lookup for online masters of accounting, create your own flexible schedule, and learn the art of managing finances. You will learn about asset management and valuation, improving the business’s working capital. In addition, it will help in assessing current assets such as inventory and account receivables adequately.
2. Reveals Financial Metrics
Today, the role of finance goes beyond preparing an income statement and balance sheet. It reveals financial metrics regarding the business’s operational efficiencies. The profitability ratios shed light on the firm’s ability to generate profit out of its sales. Likewise, it highlights areas that require corrective actions by the management. For instance, the high carriage charges might be reducing profits. Thus, managers can look for another logistics company to reduce the costs.
Moreover, it helps in measures the relationship between different variables. For example, you would see how much income you generate from assets and expenses as a percentage of sales. It can also disclose debt ratios so that management knows about the company’s reliance on external funding. All this information will allow leaders and executives to make decisions that can improve the company’s financial future.
3. Facilitates Investments
Undeniably, decisions regarding investments are tricky. Some owners are willing to go all-in without analyzing their risk tolerance levels. However, others don’t want to take out money from the deposit accounts. The finance managers and accountants can put funds to good use. They are well-versed with lucrative investment options, expanding their income sources. Hence, instead of settling for an 8% interest rate, financial analysts can help you with an annual return of 12% through investments in stocks.
Furthermore, they evaluate sales and market share growth to determine the acceptable trade-off for growth. After all, business growth often drains cash reserves and borrowing funds. With an in-depth analysis of investment and growth opportunities, the business can strategically plan for the future. Similarly, the company will get a clear idea of whether they should invest in growth or not, helping them make correct decisions.
4. Unfolds Cashflow Problems
Nowadays, even well-performing companies suffer from cash flow problems. They don’t have enough cash available to manage routine expenses or purchase inventory. Financial management can unfold these cash flow problems to the administration, encouraging them to take action quickly. Perhaps, the managers can negotiate payment terms with suppliers, requesting them to offer extended credit. Likewise, they could provide customers with early payment discounts to bring cash into the business.
Failure to recognize these cash flow problems can land the business into a liquidity crisis. Hence, always make well-informed decisions regarding cashflows and plan strategically. For example, if cash flow is a recurring issue, set a limit on credit sales. Increasing cash sales will bring more cash into the business, closing doors for liquidity issues. Besides, you can use your cash flow statement to anticipate capital expenditures in the future.
5. Optimizes Taxes
Entrepreneurs usually measure performance based on operating profits. What they don’t understand is that operating earnings are exclusive of taxes. Instead, you have to evaluate new initiatives and development projects on an after-tax basis. You have to measure them against tax implications and tax after-contributions to get a more realistic idea. Well, finance managers perform these tasks beforehand.
In the financial statements, they record net profit that is inclusive of taxes. Hence, allowing companies to consider the impact of changing tax regulations and make decisions accordingly. Recently, the corporate tax rate reduced to 21% in 2020, increasing profits. But without calculating the impact of taxes, companies wouldn’t have recorded the net increase in earnings. Therefore, build a seamless accounting infrastructure to make wise decisions.
From day one, finance has played an integral role in businesses. After all, what would a company do without money? Hence, you have to manage funds effectively to plan and make informed decisions. Accountants calculate financial metrics to give management an idea of the company’s financial health. Likewise, they manage assets and foster investments to boost income generation. Leaders can use this information to make the business thrive and flourish.