The Basics of Business Finance | Small Business

Business finance, commonly referred to as corporate finance in the business environment, is the function responsible for allocating resources, reviewing debt and equity financing opportunities, creating economic forecasts and various other functions. Small businesses may not have significant corporate finance departments because their financial needs are usually much less than larger companies. Small business owners may also rely on outside advice regarding business finance decisions.


Business finance often uses statistical or mathematical formulas for creating financial results relating to business information. Business owners may use internal or external business information in business finance formulas. Internal business finance formulas usually relate to maximizing production output and eliminating waste from business operations. External business finance formulas often present business owners with a review of the economic marketplace and potential business opportunities.


Common types of business finance formulas include net present value, payback period, return on investment and similar mathematical formulas. Net present value estimates future cash flows from business situations and discounts them back to today’s dollar value. The payback period formula is a basic calculation that divides the initial capital outlay by how many months it will take the company to replenish this amount. Return on investment takes the total gain from the investment less investment costs divided by the investment’s cost.


Business finance formulas provide business owners with specific information relating to the return on investment for various business operations or new growth opportunities. These formulas help business owners compare the total cost of each business decision and the potential profit each one offers the company. Business owners may set a minimum return percentage when making business decisions. Setting a higher minimum return percentage may allow companies to include a buffer amount to ensure the company achieves maximum profitability.


Business owners may choose to implement business or accounting software that can help them quickly and accurately conduct business finance analysis. Many business software programs require basic data input from the business owner. Once this function is complete, the business software will use default or custom formulas set up by the business owner to calculate business finance formulas. This allows business owners to create multiple formulas using different business scenarios and ensure they make the best decision possible.


Business owners should not rely solely on business finance formulas when assessing new growth opportunities or making business decisions. Using qualitative analysis can help business owners round out the decision-making process. Qualitative analysis uses an individual’s personal experience and expertise when assessing business situations and making decisions. This additional analysis often presents a more well rounded business analysis and may create a higher comfort level when business owners make decisions.

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