By Amalya Teitelbaum, Business Editor & Manager
There is a popular saying that money equals power. When it comes to businesses and their finances, however, this phrase is not just some overused cliche.
One of the most crucial parts of creating, starting, and maintaining a business is managing the owner’s finances. Business finance, commonly referred to as corporate finance, is the function responsible for identifying assets and liabilities, allocating resources, understanding a company’s debt and equity, and reviewing economic opportunities amongst other elements. When it comes to corporate finance there are several parts that are critical for businesses of any size or stature.
Included in the concept of business corporate finance are three basic financial reports. Firstly, there is an Income/Profit and Loss Statement. This statement shows the company’s taxed income over a specific time period. The second type of financial report is called a Cash Flow Statement, which shows the flow of cash throughout the business and what available cash there is for making business decisions such as adding employees or planning major purchases. The third type of financial report is called a Balance Sheet, which organizes all of a business’s assets and liabilities.
In order for owners to create these financial statements, they must have an understanding of basic business formulas and software. There are several different types of common business financial formulas including the net present value formula, payback period formula, and the return on investments formula. The net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. Simply put, the NPV estimates future cash flows (FCF) and discounts them back to today’s prices. The payback period formula determines the time it would take a business to recover an investment. This formula is a basic calculation that divides the initial capital by the number of months the company will take to replenish this amount. The return on investments (ROI) formula measures the probability of an investment gain. It utilizes a ratio that compares the gain or loss from an investment relative to its cost. These formulas assist owners in comparing the cost and potential profit from each business decision the company makes.
Companies can choose to install software to assist with the analysis created based on these formulas, which will allow for quicker results on a larger scale. This software may also help an owner or company keep track of day-to-day expenses, assist in creating general reports, and let owners know when payments are due and/or revenue is expected.
While they may be helpful, business owners certainly should not rely on financial formulas and software alone when making financial decisions. It is essential that businesses utilize their finances in the most efficient way to facilitate company growth. They should use their own business experiences as well. It is essential for owners to create an analysis of themselves, their colleagues, and the current economic situation, in order to establish a more well-rounded business analysis.