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The importance of finance and its role within business cannot be overemphasised. Whether it’s a small business or large enterprise, financial management is key to its growth and success. With India’s economy growing phenomenally, there are different sources of business finance available today. While that makes it easy to get funds for business, the challenge lies in understanding how to manage funds effectively. Let’s understand the nature and importance of business finance and how small businesses (SME) can leverage it to grow their business.
Need for and Importance of business finance
Let’s begin by understanding the need and importance of business finance. Why do SMEs need business finance? This is fairly simple. Small businesses often lack adequate funds and need it to grow their business. Whether you are a SME manufacturer or a doctor/medical professional running your own clinic, funds are required to grow your business. A SME manufacturer can avail a business loan for manufacturers while a doctor running a clinic can avail a business loan for doctors.
What is difficult however is to intelligently plan and manage the funds availed to expand and grow the business. And that’s the importance of business finance for SMEs. For instance, without a proper business plan it’s possible to waste funds in activities that deliver poor ROI; lack of financial knowledge can lead to overspending, e.g., on hiring resources, purchasing raw materials etc.
In the next section, we’ll explain the importance of business finance and how large and small businesses can do more with it.
1. Smart financial planning
Financial planning for a SME has two main parts – first, how much funds are required, and second, how to use those funds for maximum ROI.
Raising funds without a proper plan of how to best utilise those funds is mismanagement. In fact, how much funds you require and how you plan to invest those funds, are among the first few questions your lender will ask before sanctioning a business loan. This is because the lender must reduce their risks and ensure that you will be able to repay the loan in time.
The importance of finance and its role within business therefore lies in being able to assess your current financial health and understand how additional funding will help it expand. Your financial statements (e.g., P/L statement, balance sheet, cash flow) are a great place to start as it will provide insights on your cost and revenue centres and what’s delivering results.
Moreover, it’s also important to evaluate on the right type of business finance option you should be availing (e.g., equity or debt). It will also enable you to plan strategically on how and where to invest (e.g., capital budgeting, equipment purchase, marketing, asset creation etc.) and grow the business’s financials.
2. Fund allocation and strategic growth planning
Strategic growth and allocation of funds go hand-in-hand. The importance of business finance lies in that it enables businesses to plan, project, allocate and invest smartly in areas that will maximise returns.
For example, consider yourself a steel supplier and you have availed a business loan for the steel industry. The next question is, how do you utilise these fuds? It’s important to understand that your allocation must be aligned to your business goals. So, if your business goal is to get new customers, then funds must be allotted for running marketing campaigns (online and offline), participating in steel sector events and conferences, creating sales and marketing collaterals, building a tele-sales team and customer support team, listing your business on steel industry directories and B2B marketplaces, and working on the supply chain and logistics ecosystem.
Keep in mind that strategic vision should be for the short and long term. It should also avoid casual expenses and focus on areas that give optimal returns. In our above example, strategic planning of funds could relate to identifying the right digital marketing channel for business – i.e., social media promotions, SEO traffic, paid advertisement, WhatsApp marketing etc.
3. Understanding company’s financial health
There’s no denial to the importance of finance in business organisation. And that means understanding where the company stands in case of its financial health.
For instance, consider yourself a trader who is struggling with working capital challenges. Now, to meet daily cash crunch challenges, it is likely that you will consider taking a business loan for traders. Business financial management will enable you to evaluate if that’s the best option for you or there’s an alternative. That is, the need and importance of sources of business finance – is there the need to borrow funds? And if yes, are business loans the right choice?
Understanding the company’s health will enable you to check all channels of expenses and revenue and identify a possible solution. For instance, it might come to your notice that you have lots of pending payments from customers i.e., accounts receivables. In such a case are loans the only option? If a loan is to be taken, are there loan restructuring options? How about availing invoice discounting or bill discounting options?
4. Identifying growth opportunities and optimisation
The nature and importance of business finance can also help your business to identify new business growth opportunities. For example, financial planners and analysts must be able to analyse business spends and resources to identify new opportunities for growth. They must be able to monitor profits and losses and take calculated risks for growing the business.
For instance, you may be in a seasonal business with high volume sales for 6-8 months of the year. Now, during the lean months, there’s also less inventory to stock in your warehouse. A financial planner should be able to identify new earning opportunities from here. For instance, warehouse space can be given on rent to another business for 4 months. This will create additional revenue which will help to repay EMIs and run operating costs.
Similarly, the function of business finance is also to help you to find new ways of operating to cut costs and increase efficiency. For example, while analysing financials if it is identified that a significant part of your expense is on logistics and transportation, the relevant teams can be notified of it. By doing so, a smarter, leaner solution can be identified. For instance, new 3PL partners can be found, or instead of shipping via full-truck loads, PTL shipping can be opted for to cut costs.
5. Preparing for the future and contingency planning
The importance of business finance for a company is beyond the present. It’s also for the future. That is, business finance mapping should enable you to plan the way ahead for your company financially. For example:
- Based on how your current financial health is and the forecast and expansion plans, business finance management should plan how the next few years of the business is going to look like. E.g, will the company plan growth based on their profits or go for external investors? If looking for external investors, will it be debt such as business loans or equity financing?
- How will the capital markets affect your business? The importance of financial market in business finance will be impacted by the securities traded, investments, SME IPOs etc. Business finance planning should also take that into account.
- Cost analysis and profit planning, that is understanding the role of inflation, analysing product/service costs, competition, market trends and planning finances to ensure that y-o-y growth and profits are churned.
As you must have understood by now, business finance management is key to the success of every business. Having a great idea and starting a business is only the first steps. What matters more are the strategies you make to grow that idea into a large profitable business.
Financial health is vital for every business, more for a small business. So, if financial planning is not done in the inception, and miscalculations lead to poor management of funds, the results will only lead to further bad news. Also, having a strong financial health will help your brand to build trust and credibility in the market. It will enable you to stay prepared for bad days and any contingencies and also buy assets for your business in the long run.