Successful business strategies are grounded in meticulous attention to detail, from acquiring the right talent and generating new leads to maintaining regulatory compliance and optimizing your offerings. However, the most effective companies never lose sight of what really delivers success: strength in the core elements of business finance. Whether you’re an entrepreneur scaling up your first company or expanding a successful enterprise in new directions, understanding business finance gives you an edge against competitors who neglect the fundamentals. What are the principles of business finance? Here, we take a closer look at five core concepts you need to know.
1. Defining the fundamentals
The fundamentals of a company are determined via quantitative and qualitative analysis. These analytic measures include:
- Assets: Everything of value within your business, including cash, property, inventory, and less tangible factors, such as experience and talent
- Liabilities: The debt owed by your organization, including loans and lines of credit
- Profitability: The funds available after subtracting all liabilities from all current assets
- Revenue: All the money generated by the sale of your offerings before expenses are deducted
- Growth potential: The expected performance of your business in the future
Understanding the fundamentals of your business makes it easier to manage costs, identify opportunities to improve efficiency, and gain a clear perspective on the strength of your finances. At the same time, investors will evaluate the company’s fundamentals to determine whether the benefit of investment in them outweighs the risk.
2. Comprehensive reporting
Business fundamentals aren’t just data points. They provide actionable insight to better understand how your company operates. Accordingly, information that determines the financial health of your business must be compiled and shared for analysis via regularly scheduled reporting. The most common reports include:
- Balance sheet: Consider a balance sheet a bird’s-eye view of your corporate finances. This document compiles all liabilities and assets to provide a comprehensive snapshot.
- Cash flow statement: Cash flow describes the movement of money in and out of your business. By providing a full picture of patterns in cash flow, this report makes it easier to manage available funds and plan for new staff, new products, and seeking additional sources of capital.
- Profit and loss statement: Profit and loss, or income, statements demonstrate how much and where money is spent over a specified period of time.
Reporting may be compiled monthly, quarterly, annually, or at whatever frequency works for your company. Lenders and other sources of funding also often require you to provide this kind of information as a condition of financing.
3. Evaluation via financial ratios
Not every variable can be immediately compared to others, and some questions may require a deeper level of analysis using financial ratios. The most commonly used ratios include:
- DuPont analysis: Analyzes efficiency in operations and asset usage along with financial leverage to gain a clear picture of your company’s return on equity
- Quick ratio: Your company’s ability to meet short-term financial obligations with liquid assets
- Debt-to-equity ratio: Determines the proportion of debt compared to the equity held within your company
- Price-to-earnings: Compares the current price of a share of your company’s stock with its per-share earnings to calculate a more accurate valuation
- Degree of financial leverage: The relative stability or lack thereof for calculated earnings for each share of stock
Using these ratios provides a wealth of information, from a more accurate understanding of profits to ensuring shares of the company are properly valued. Combining several approaches provides multiple perspectives to ensure more informed decision-making.
4. Optimizing the fiscal year
All businesses must establish a fiscal year or a one-year period used for a wide range of internal functions, including budgeting, accounting, and finance. Additionally, the fiscal year chosen impacts when you’ll file taxes and receive any credits or refunds tied to that date, like the Scientific Research and Experimental Development (SR&ED) tax credit program.
Most businesses prefer to follow the standard January through December calendar, but others find different fiscal years better suit their needs. If you wish to select another date, an application must be filed with the Canada Revenue Agency (CRA) that explains the reason for the requested change. If you rely on SR&ED tax credits, timing your fiscal year-end with your R&D work and need for the funding could offer an ideal solution and minimize gaps in the capital.
5. Bringing all the data together
By staying on top of these business finance basics, your organization is well-positioned to make data-backed decisions that support profitability today and for years to come. A few of the important questions to ask as you create strategic plans and manage your business’ finances include:
- How much money is spent each month, quarter, and year?
- Where are those funds allocated?
- Where are we overspending?
- Are we underspending in key areas?
- Are products and services priced appropriately?
- Do overlooked costs threaten our bottom line?
- Does our capital stack rely too much on dilutive funding?
- Have we maximized sources of non-dilutive funding?
- Do we clearly understand the equity in our company?
- Do stock prices reflect the real value of our organization?
- Is the arrival of rebates, vouchers, credits, and refunds timed with our most significant financial need?
Understanding business finance makes it easier to answer these questions and achieve financial stability for your company and other stakeholders. To ensure even greater financial predictability, apply for SR&ED Advances from Easly. You can access your SR&ED refund as it accrues throughout the year, rather than waiting for a lump sum payment from the CRA.
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