ccounting is the way to keep score of a company's activities, but finance brings a

business to life. Finance passes through every part of a firm's operations. Few
decisions are ever made without input from the people in financial management.

Tip

Finance is critical in just about every business decision, from planning and
budgeting and cash flow management to the capital structure and how you control
risks and costs.

Strategic Planning and Budgeting

You wouldn't load the family in a car and head out for a vacation without having a
map to your destination, would you? It's the same with your business. You define
where you want the business to go, determine the objectives and then ask your
financial people how much it will cost to get there. These plans form the basis for
hiring employees, capital spending, raising capital, marketing campaigns and
bonuses for management.

Equity or Loan?
After creating the strategic plan, the finances turn to the methods of funding a
company's operations. Is it better to raise more equity capital from investors or
take out loans from lenders? Financial analysis gives the answer to this question.

Cash Flow Management

Who's keeping up with the cash? The finance people are. A small business owner
always wants to know how much money is in the company's bank account. It's the
job of financial managers to make sure the business has enough liquidity to pay its
suppliers and employee on time. If cash is getting tight, the people in finance will
make arrangements to use the firm's bank line of credit.

Conversely, having excess cash sitting idle in a bank account is a drag on a

company's return on investment. Financial analysis will spot this situation and will
find investments that produce a better return.

Profit Planning and Cost Controls

Since the basis of a business is to make a profit, it only makes sense that finance
would play a major role in finding ways to improve profitability. This might involve
determining the profitability of individual products and weeding out the losers and
promoting the winners. Finance could point out ways to improve productivity in
manufacturing or find cheaper sources of materials.

Small business owners are constantly reviewing their financial statements, looking
for any expenses that suddenly get out of line with the budgets. This is financial
management by exception. If everything is in line with the profit plan, no problem. If
not, then it needs the attention of managers to correct the deviations.

Managing Unavoidable Risks

Managing a business is risky, right? An owner has concerns about the direction of
interest rates, currency fluctuations, changes in commodity prices and risks that
his customers will not pay their invoices. Financial reports monitor these areas and
give reports to owners and managers.

Financial management analyzes the risks of international markets, checks the

credit standing of customers, goes through the terms of loans from lenders and
provides an assessment of the perils in these areas. Nothing is ever for certain, and
finance helps put the hazards in perspective.

The role of finance in business is indispensable. Business owners use financial

data every day when making decisions. They use finance to analyze the present
and project the future. Companies cannot operate without the benefits of financial
analysis.