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For any small or large business, business finance is one of the important functions. In fact, it is one of the central departments that maintains relationships with all other departments within the organisation. However, do you know the core functions of business finance management?
This article describes the scope of business finance and also explains the relationship of finance with other business functions.
7 Functions of business finance
Here are 10 key functions of business finance.
1. Raising capital
Raising capital is the most important function of business finance. Taking decisions on raising capital is one of the key functions of the business finance department. It is the finance team that decides how to raise capital. There are various options available in the market to raise funds such as equity financing, business loan, financial aid through MSME schemes, and so on.
MSMEs usually do not have a dedicated to team handle business finance. For example, in the case of one person company, the proprietor handles all the functions including finance, marketing, sales, etc. In such a scenario, it is the proprietor’s responsibility to raise capital for their one person company.
2. Working capital management
Managing working capital is one of the challenges faced by MSMEs. Business finance draws a strategy to ensure that the company’s day-to- day operations are carried out without any financial hic-ups. Therefore, it is one of the important functions of the business finance department. It involves monitoring and controlling the company’s cash flow, accounts receivable, and inventory and liabilities like accounts payable. The finance department ensures smooth day-to-day operations. The goal is to maintain an optimal balance between these components to meet operational needs without tying up excess capital.
3. Investing capital
Another important objective of business finance management is investing capital. The finance team evaluates various investment opportunities and decides where to allocate funds. While undertaking this task, the team also assesses the potential risks and returns associated with each investment option.
4. Safeguarding investment
In today’s uncertain market conditions, investing capital is not enough. One has to keep monitoring the investment for maximising profits and lowering risks. Business finance management mitigates such risks by safeguarding investments.
5. Risk mitigation
Another important function of business finance management is to mitigate risk. In today’s era, markets are volatile and hence, risk mitigation plays a crucial role. Business finance management ensures the strong financial health of the company. To enable this, it is important to invest wisely, take calculated risks and constantly monitor the market.
6. Financial planning
Financing planning includes confirming the vision and objectives of the business and drawing a financial plan to achieve these objectives. To achieve this, the business finance function sets budgets, identifies risks involved with created budgets, etc. Moreover, the business finance function takes care of financial planning to ensure the company adapts to changing financial needs. It also involves securing and managing the current assets of the company.
7. Other functions
Depending on the size of your business, other functions of business finance management include taking decisions about liquidity, mergers and acquisitions, dividends, etc.
Relationship of finance with other business functions
The role of business finance is not just limited to investment and raising capital. In fact, without finance, other departments may not be able to function. Here is how the finance management function closely works with other business functions in the organisation.
- Providing funds for purchasing raw materials, new machinery, maintenance of existing machinery, etc.
- Evaluating the cost-effectiveness of current production processes and maximising productivity
- Allocating funds for various marketing activities such as advertising, promotions, etc.
- Evaluating the business impact of the marketing campaign
- Analysing revenue streams, pricing strategy, sales performance and profitability
- Generating bills for customers and ensuring timely payments
- Handling payroll and compensation packages for employees
- Allocating resources for recruitment, training and reskilling programmes for employees
Supply chain management
- Business finance is responsible for supplier payments and meeting expenses associated with inventory management
- Assessing the financial impact of disruptions in the supply chain management and having a contingency plan
- Allocating funds for IT infrastructure, technology adoption and upgrades
- Evaluating cost-benefit analysis of various IT investments
Concluding remarks: how to handle business finance effectively for your MSME?
- Have a business plan that will help you in forecasting
- Maintain budget for all your business activities and operations
- Apart from business loans and equity, there are various options for financing your business such as an overdraft facility
- Have contingency funds
- Keep track of all your business expenses. Ensure that the budget is followed diligently.
- Get advice for a financial consultant if needed.