A company or any kind of business organization is basically the manifestation of a concept based on a product or service that is believed to resolve a particular absence in the marketplace or community in which it is launched. It requires a well-thought-out marketing plan that facilitates the knowledge of said product or service reaching the preferred target audience.
Even if both of the above factors are planned and implemented effectively, there is yet another crucial aspect that is not prioritized and oftentimes not even considered—a sound comprehensive financial plan.
Role of Finance in Startups
The financial component is the most crucial in a business plan, which provides clarity with regard to the goals of a startup and how those goals would be met in a systematic fashion. During the critical growth stages, when financial backing is required from angel investors or banks, a clear financial plan from the entrepreneur is one of the main factors that influence investors into making a favorable decision. This is why the role of finance in startups is crucial.
When it comes to startups, there are specific elements of financial planning that need to be implemented.
FINANCE & BUSINESS TIES
Revenue projections and sales forecast
As a startup owner, you will be required to formulate revenue projections based on the market situation, inventory, geographical location, and the perceived demand for your product. What are the optimal prices for your offerings? Who is your target audience, and how will they be made aware of the business? What kind of revenue are you expecting to make in your first year and further down the line?
The estimates need to be backed up by sound financial research instead of just putting out a wish list of numbers. It’s important to understand that these are not just figures to impress investors but also a fundamental guide for taking the business forward and steadily fulfilling its potential.
This is the juncture where your business expenses need to line up with revenue generation or sales. This requires a three- to five-year revenue projection. If your business is built on strong viabilities, it should not be very difficult for your income, at some point, to rise above the expenditure. A feasible breakeven analysis attracts promising investors to the business.
Cash flow is the deciding factor for how long a business actually lasts in the market. It’s important for the finance section to make a projection in the long term with regard to the volume of actual cash moving in and out of your business. It’s crucial to have a realistic understanding of what percentage of your invoices would be cleared in cash within a meaningful timeframe. If you perceive a situation where the cash flow outlook is declining, it’s imperative to make adjustments to your expenses beforehand.
READ MORE : 7 Important Questions a Financial Plan
What Is the Role of Finance?
When it comes to any business, the most visible components tend to be the product and marketing. This is what the general public sees when looking at a company from outside. However, for the smooth running and technically, the existence of these components, the financial management division needs to be sound.
At the end of the day, the role of the finance department or a finance manager is to manage money in a way that meets the goals of the company’s shareholders. However, this can be achieved effectively only if all departments work in tandem with the finance section. Ultimately, every business decision made by any of the departments carry a financial consequence.
Another core responsibility of the financial manager is to keep track of the cash flow. In an ideal world, the revenue obtained from selling the company’s products and services should take care of expenses as and when they arise.
In the real world, this does not necessarily happen, so the financial manager will need to have a comprehensive understanding of the expenses of each department, and arrange alternate funding resources, so that bills are paid on time and daily operational expenses are met.
Role of Finance in Business
At some point in the planning process of a business, the entrepreneur will arrive at a stage where they need to see how the venture generates profit. To reach a stage where the venture turns profitable, what are the resources you need to have in place, what are the interim goals that you would need to achieve, and, finally, what is the cost to reach this point? The financial analyst predicts these numbers through analysis and in-depth research.
The next phase, as far as the role of the finance department of a business goes, is to lay out various possibilities to raise funding for the company’s operations. From capital wealth and loans to equity capital from investors or bank loans, the finance manager does an extensive analysis to decide on the best possible option.
Once the business has incoming cash as a remuneration for providing services, the role of the finance department is to keep track of the flow. There needs to be adequate liquid funds to pay salaries and clear supplier invoices. The finance person needs to set up backup funding resources, such as a credit line, as a precautionary measure when cash reserves run short. At the same time, if there is an excess of cash reserves in the company account, further financial assessments will need to be made to find investments that provide a higher return.
Profits don’t just come through sales. The role of finance in business also includes profit planning and devising a plan that ensures the company is run to maximize the profit potential. This includes scouting for cheaper raw materials, letting go of poor performers, hiring better talent, reviewing product lines, and terminating products that perform poorly and which do not align with the profit plan.
READ MORE : Which Skills Do Financial Analysts Need?
What Is the Importance of Finance in Business?
Cash is the fuel for any business, which is why careful planning for managing money in business needs to be made. According to analysis, 82 percent of all businesses fail owing to a scarcity of adequate amounts of cash.
With numerous transactions being made on a daily basis, it is imperative to have a monitoring system in place to ensure that the cash flow is in accordance with whatever profit plan has been designed for the company.
Readily available finances are crucial to the growth of a company. Daily operations that are disrupted due to inadequate finance can be detrimental to the company’s long-term business plan.
Any successful business model includes business expansion. A company with stagnant growth is not a sustainable enterprise. Risks need to be taken; new products need to be introduced into the market; and new markets need to be tested. Any business failing to do this will end up being left behind by the competition, and eventually turn incapable of sustaining itself.
Apart from this, all businesses will pass through tough phases as part of their overall entrepreneurial journey. Planning for these tough times, and setting up emergency funding reserves, is imperative in times of volatile market conditions.
Discuss the Role of Finance in the Business World
In the business world, finance involves various paradigms that go into the management of money for a profit-oriented organization. This includes lending and borrowing, trading and selling securities, raising capital, and making sound investments. The reason for such finance activities is to provide businesses with the opportunity to execute projects that are meant to generate revenue.
A sound financial plan and the practical application of that plan are necessary for an enterprise to sustain and thrive. From the perspective of the business world, it is imperative that more businesses grow and generate profits, thereby injecting money back into the markets. This provides a favorable environment for new entrepreneurs to start innovative projects that help broader communities in the long run—a mutually beneficial cyclical relationship.