Understanding The Basics of Business Finance

What is business financing? And what does it entail? There are a variety of different ways to finance a business, including borrowing money from a lender, issuing stocks or bonds to investors, or receiving venture capital, but ultimately, business financing is the process of funding a business’ operations with money from outside the business.¹

Understanding business finance

When it comes to understanding business finance, it’s worth noting right away that the world of modern finance is no longer what it used to be – where the finance department only carries out accountant-based functions. Rather, it has evolved significantly to include a more holistic value-add to businesses. Now, for example, a Chief Financial Officer (CFO) not only focuses on numbers, but also brings meaningful strategy and leadership to a business, thanks to technological advancements in financial automation.² People in business finance also take care of a business’s funding, and the tools and financial analysis used to distribute these financial resources.³ Corporate finance teams identify any potential financial problems the business might encounter, and subsequently prevents them from happening.⁴ Ultimately, the goal of finance in business is to maximize the value of a business through effective financial planning, resource management, and finance growth, while always being mindful of risk and profitability.⁵

With this in mind, a strategic use of financial tools, such as loans and investments, is pivotal to the success of a business.⁶

Growing the business’s finances through capital investments is perhaps one of the most important activities of a business finance team.

What activities govern business and finance?

1. Investments and budgeting

Capital budgeting (also known as investment appraisal) is how a business will determine if a project – such as opening a new branch, or investing in new equipment – will increase the value of the company, or be profitable. A project is deemed profitable when the return on investment is greater than the cost of the capital.⁷

In the planning or budgeting phase, corporate finance also needs a clear understanding of the current business finances of the company, where the funding is coming from, and how much the business needs.⁸

2. Capital financing

Growing the business’s finances through capital investments is perhaps one of the most important business activities of a finance team. There are two types of business capital that need financing:⁹

• Fixed capital is used to purchase fixed assets for the business, such as land, buildings, property, and equipment
• Working capital is typically used to procure raw materials and manage fixed expenses such as overheads and wages

Raising business finance is typically done through resources such as shares, debentures, banks, financial institutions, the sale of stock to equity financing, and creditors. Corporate finance also oversees the business’s short-term financial management to ensure sufficient liquidity to carry out the day-to-day operations of the business.

3. Dividends and capital return

How a business structures its capital is vital to optimally increasing the value of the business. A business is determined to be balanced or a risk, based on the ratio between its liability and its equity financing.¹¹

With artificial intelligence and machine learning taking more ground in business finance, the days of corporate finance teams keeping records and balancing the books are numbered.

4. Debt Financing

Business debt financing is the process where a business takes out a loan from a lender, and in return, offers the lender an ownership stake in the business. The business then becomes obligated to make payments on the principal amount of the loan, as well as any accrued interest. There are a few reasons why businesses might take on business debt financing:¹²

• To expand their business by investing in new equipment, property, or hiring more employees
• To cover day-to-day expenses when they don’t have enough cash on hand
• To refinance an existing loan with a more favorable interest rate

Career paths in business finance

If you are a business finance specialist, you will typically provide independent financial advice to clients ranging from corporate and financial investors to governments, private companies, and individuals.¹³

1. Private equity

Equity financing or funding is when a company sells shares of ownership (i.e. equity) to investors in order to raise money for its operations. Private equity companies help raise money for businesses that need more capital. Unlike banks that do this by selling shares or company bonds, a private equity company offers finances directly to the business in return for a stake in ownership.¹⁴

Guy Hands, founder and chairman of private equity firm Terra Firma says, “A successful private equity career requires not only mathematical but also interpersonal skills. Numerical ability – the skill to process numbers swiftly and efficiently – is important, but so is relating to people. Businesses ultimately are about individuals and their personalities and to be successful in private equity you need an understanding of the human dimension too.”¹⁵

2. Corporate development

If you have a career in corporate development, you are responsible for facilitating and carrying out mergers, negotiating acquisitions, executing divestitures, and ensuring business capital is being raised in-house.¹⁶

3. Treasury

Treasury is responsible for the business’s capital and manages its liquidity and risk management through forecasting cash flow, managing working capital, and maintaining credit lines.¹⁷

Other duties include investing funds and pension funds, managing customer credit, and implementing regulations that keep control over treasury activities, while reporting back to management on the liquidity and financial status of the business.¹⁸

4. Investment banking

The investment banking career typically begins with an internship, with most beginner investment bankers starting out as financial analysts.¹⁸ Investment bankers help businesses develop strategies to gain access to additional funds. This can be through issuing and selling securities, or by providing critical information about the financial health and status of companies during a merger, an acquisition, and any other financial transaction.¹⁹

The above-listed paths in business finance are just a few of the many options you have if you’re interested in a career in finance. The business world is constantly changing and evolving, so it’s important to stay up-to-date on the latest trends and advancements in order to make sound decisions for your business finances. By understanding the basics of finance, you can position yourself as a professional – having the skills needed to work with small businesses and large or private companies alike.

With artificial intelligence and machine learning taking more ground in business finance, the days of corporate finance teams keeping records and balancing the books are numbered.²⁰ Corporate finance is now, more than ever, about helping decision-makers make informed business decisions – whether it’s for managing a small business or a large company. With their access to new software integrations, it’s possible to analyze data patterns, ask the right questions, and communicate key insights about the business’s financials, enabling corporate finance to solve real-world business problems.²¹