What is the purpose of finance in a company?

Accounting is the way of keeping track of a company's activities, but finance gives life to a business and runs through every part of a company's operations. Few decisions are made without the involvement of those in charge of the financial management.

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The financial management of a company involves several verifiable elements and is essential for business success. Being able to understand the purpose of finance in a company is one of the most important activities of this process. For this reason, companies need to know what the financial goal is to properly manage their capital and track their progress.

Regardless of the size of your company, you must have a roadmap to make decision-making viable and that these are aligned with the goals you pursue. A bad decision can harm the scope of your objectives, producing a domino effect that will end up affecting your entire company in its extension.

Finance is like that road map that acts as a guidance tool that provides important and verifiable information so that company directors can make their decisions and take actions having tested the ground.

In this article, we try to explain the purpose of finance in companies and how to maintain organized and efficient financial management.

Importance of finance in business.

Can you imagine going shopping and not controlling what you spend, not knowing how much you pay in taxes, how much your expenses are, or if you have enough income to buy a new car or buy a house? You can't, can you?

You need to have a record of your finances to be able to keep up with your financial expenses, otherwise, you would not be able to maintain your standard of living and surely the money would go away very quickly.

The same happens in a company. Without finance, companies could not grow or maintain themselves over time. Finance exists in a company to make decisions more easily, to judge what is happening, and to decide on the best option. The only reason for the existence of finance is to provide the pilot (owner or director of the company) with such information so that he can make good decisions.

From this perspective, finance forms the backbone of almost all business decisions, from planning, budgeting, and cash flow management, to capital structure and how risks and costs are controlled.

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Strategic planning and budgeting.

You are the one who defines where your business is going, the one who determines the objectives, and the one who asks your financial staff how much it will cost to get where you want. These plans form the basis for employee recruitment, capital spending, capital raising, marketing campaigns, and management bonuses.

Equity or loan.

After creating the strategic plan, finance moves on to the methods of financing a company's operations. Is it better to get more equity capital from investors or borrow from lenders? A financial analysis answers this question.

Cash flow management.

Who keeps up with the cash? Finance people do. A small business owner always wants to know how much money is in the business bank account.

It is the job of financial managers to make sure that the company has enough liquidity to pay its suppliers and collaborators on time. If cash is running low, the people in finance will arrange to use the company's bank line of credit.

On the contrary, having excess cash sitting idle in a bank account is a drag on a company's return on investment. Financial analysis will detect this situation and find investments that produce a better return.

Cash planning and cost control.

Since the foundation of a business is making a profit, it makes sense for finance to play an important role in finding ways to improve profitability. This might involve determining the profitability of individual products, weeding out losers, and promoting winners.

Finance could point to ways to improve productivity in manufacturing or find more profitable sources of materials.

Small business owners must constantly review their financial statements, looking for any expenses that suddenly slip out of budgets. This is financial management by exception. If everything is in line with the benefit plan, no problems will occur. If not, then you need the attention of managers to correct the deviations.

Management of unavoidable risks.

Running a business is risky, right? Business owners are concerned with the direction of interest rates, currency fluctuations, changes in commodity prices, and the risks of customers not paying their bills. Financial reports monitor these areas and provide reports to owners and managers.

The financial administration analyzes the risks of the international markets, checks the credit situation of the clients, reviews the terms of the loans of the lenders, and provides an evaluation of the dangers in these areas. Nothing is certain and finances help put the dangers in perspective.

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In short, the objective of finance in companies is essential. Business leaders use financial data every day when making decisions. They use finances to analyze the present and project the future. Businesses cannot operate without the benefits of financial analysis.