Business finance is a broad term encompassing many things regarding the study, development, management, and allocation of funds and assets for the purpose of achieving business objectives. It involves the study of financial transactions, including credit, loans, mortgage, investment, purchases, sales, and payments. The objective of business finance is to maximize the returns to investors while minimizing risks. In theory, this means that managers seek to reduce the risk to the company’s creditors by managing funds in the most effective and efficient manner possible. In practice, business finance is actually quite tricky and challenging, even as an art of making better use of the financial resources available to maximize earnings.
While no business can really be faulted on its lack of ability to forecast profits and/or the timing of capital investments, good business finance is necessary to ensure long-term profitability. A company’s forecasts are primarily made in order to meet internal company objectives. Good forecasts help managers determine whether or not to change the course of action, if any, based on their forecasts. Although the art of forecasting may appear to be very difficult, it is in fact relatively simple when one considers that there are basically three kinds of forecasts: fundamental, operational, and value-based forecasts. Fundamental forecasts, which include the balance sheet, assets, liabilities, and revenues; and operational forecasts, which include gross and net income, inventory levels, customer service, working capital, and advertising expenses; are the basis on which value-based forecasts are made.
The study of business finance also involves the development of policies that will facilitate the achievement of company objectives. The key to business finance is a proper and well-planned institutional structure that will facilitate sound financial planning. For instance, if a business needs additional financing for start-up costs, then it will have to develop financial plans that take into account possible investors’ interests. The same planning process should be applied, to a greater extent, for long-term planning purposes.