To a business, money is the fuel which enables it to run. Without enough finances, a business may not get a solid start, which is crucial in determining its future success. Business finances make operating a business smooth and efficient, and this is what generates profits for the business in the end. There are many reasons why a business’ are important:
1. For startup: a new business will always require capital for startup. You need to buy the assets and materials for a new business and also to hire its first employees. Do not forget about the running cost of the business. Before the business starts generating enough money to run itself, a business person needs to have enough finances that will be enough for its overall running.
2. For expansion: once a business has established itself, it starts to grow. The increasing demand for its many clients may make it hard for the business to meet all their needs, requiring an expansion. Besides, as the technology advances, the business might need to adopt the new technology to operate better and keep up with its competitors. The business might also require moving to a much bigger premise. Generally, business expansion costs a lot of money, which the business may not be able to generate at that moment, hence the reason as to how having your finances right can benefit your business.
3. For venturing into new markets: a new market means new research, new productions, and marketing, all of which require a substantial amount of money from the business. New employees may also be required to take up operations in the new market or to serve the business’ new clients.
For these and many other reasons, a business needs to take care of its finances. Through proper financial management, a business is able to track down all its profits and cash flow, to understand the financial condition of the business. Every business person should evaluate every aspect of his business since every activity in a business impacts on its financial performance positively or negatively.
Importance of financial management
i) It ensures that the business operates smoothly even when the market is not favorable. By managing the business finances well, a business person is able to cater for the operations of the business even during those times the business is not registering solid profits until the market stabilizes.
ii) It ensures smooth operations of the business at all levels, including purchase of raw materials, production, marketing and sales. It also ensures that the business is paying all its bills, paying its employees and suppliers. Without proper financial management, business profits may not be enough to cater for the operation of the business.
iii) It makes reporting on the business’ financial situation easier. Properly kept records will be easy to read and understand. At a glance, anyone can easily tell how the business is doing. Reporting is also important to the shareholders.
iv) Finance management ensures that the business is meeting its tax obligations on time at all times. The business’ financial manager is able to plan how the business will pay its taxes in advance, to avoid tax penalties and other consequences of failing to remit business taxes.