Financial knowledge or financial literacy is something that everyone needs to be aware of, especially if you're contemplating to start a business. You should be well-acquainted with some of the basics of finance before taking the leap.
Let's first discuss about the importance of finance in business.
What is involved in Business Finance?
Business finance involves getting, maintaining, and moving money in your business. So, whatever business you start, whether a small start-up or a tech-based company, a minimum capital is required to set the stepping stone.
Proper financial management will help you grow your business and earn profit. It will also help expand your business or even venture into new fields based on your funding. Apart from growth, it will also assist to operate your business smoothly, pay taxes, and create reports to measure your business activity.
Basics of Business Finance
As financial management is quite essential, you need to know at least the basics of business finance to start a business. Here are some pointers that you need to know before starting a business.
You need capital to start a business. You may acquire starting capital through various means such as, investors, savings, inherited wealth, or loans. You need to know how much funding you need to start your own business, and you should be able to procure it. Apart from starting capital, you would also require working capital that will help you run your business until it picks up profit.
An important and mandatory aspect of a business is paying taxes. To pay the sufficient tax on time, you need to be aware of what part of your business is taxable. At the same time you need to know about the current market fluctuations, depreciation, and tax deductions.
Usually most businesses would start with some debt due to the need of starting capital. However, you need to ensure that your debt does not pile up, and increase more than your combined assets and revenues. If you require the services of third-party suppliers and vendors, then your debt ratio can affect your business. Lenders may run a credit check on your before agreeing to provide any service.
Revenue growth is quite important for a business because it determines whether your venture is successful or not. You need to ensure a positive cash flow and a healthy revenue margin. This requires you to be aware of the growth percentage on an annual basis or monthly basis to determine your future actions.
You need to create regular financial reports or statements related to your company or organisation. These reports include cash flow statement, balance sheet, and income statement among others. These reports cannot be neglected, and knowing how to create them and how they work is quite important for an entrepreneur.
If you are hiring employees or assistants for your business, you need to pay them. Even if you hire one person, payroll is still essential. You need to have sufficient funds at hand every month to pay your employees. In fact you need to plan for at least 2-3 payroll cycles ahead. Such planning requires you to know how much cash is coming in and the balance of working capital each month.
Another important aspect of business is investments. This would include funds that others invest in your business and also the funds you invest as a part of your business. Most business owners invest in stocks, bonds and traded funds to increase their profit. You need to have an idea how investments works and what type of investments would help your company to grow.
Benefits of Financial Knowledge
Knowing business finance even the basics leads to multiple benefits. Check what you can achieve with financial knowledge.
- Maximize your revenue and profits over a short-term period.
- Increase your capital value over a long-term period.
- Raise required funds and capital easily.
- Manage and control your business and finances in the right way.
- Get complete understanding of numbers and figures in your business.
- Expand your business successfully.
How Much Knowledge is Required
As you see, business finance is a must for entrepreneurs. A basic knowledge of business finance and how it works will help you start and run a successful company. Also, reading success stories of other entrepreneurs actually helps while starting out. Of course, knowledge is essential, however, everything boils down to the fact that how good you are as a learner. The faster you pick up the basics of running a business, the easier will be the road for you.