Skip to content
× FreshBooks App Logo
FreshBooks
Official App
Free - Google Play
Get it
You're currently on our US site. Select your regional site here:
4 Min. Read

Business Finance: Definition, Meaning & Importance

Business Finance: Definition, Meaning & Importance

Mismanaged finances are most small businesses’ biggest threat. According to data from the U.S. Bureau of Labor Statistics, around 20% of small businesses fail within the first year. But by the end of their fifth year, roughly 50% have closed their doors.

According to the same study, a huge 82% of these businesses failed because of poor business finance. This includes poor cash flow management and understanding of their own finances.

This is a perfect illustration of just how important business finance is.

But what exactly is business finance? We’ll go through the definition, the meaning and highlight the sheer importance it has to plan with any sized business.

Here’s What We’ll Cover:

Definition of Business Finance

Meaning of Business Finance

The Importance of Business Finance

Key Takeaways

Definition of Business Finance

Business finance is the funding a business needs for commercial purposes. It is the money business owners require to start, run or expand a business.

This finance can come from a number of different places. Some of these include:

Investments: Investors may choose to invest capital in a business in the hopes of seeing their investment rise after a set amount of time.

Business Loans: Some business owners prefer to borrow money from a bank for example in the form of a loan and repay over an agreed period of time.

Crowdfunding: There has been a rise of crowdfunding websites such as Kickstarter, Crowdfunder and Patreon. So many businesses are turning to the public as a source of finance.

Grants: A grant is a set amount of money that the government, a company or another organization can award. Grants are advantageous as you do not have to pay the money back. Although they tend to be very difficult to acquire.

Meaning of Business Finance

Finance is the foundation of any business. It is near impossible to succeed without strong finances in place.

You use finance to purchase assets, goods and raw materials. Essentially anything that will push your business forward.

This is why finance and funds are known as the lifeblood of any business. You simply cannot function properly unless you have an adequate amount of money accessible to you and your business.

The Importance of Business Finance

Capital is the most important tool when it comes to bridging the gap between your production and your sales. Business finance can be used for a number of important purposes. These include:

Financial Statements

When dealing with business finance, it’s important to go through your financial statements and connect the dots. This is between your profit and loss as well as your balance sheet and cash flow statements. You can then conclude from your documents if there is a shortage of capital. Business finance can provide the tools to plan strategies for correcting the shortage.

Strategic Planning

Every business should have a solid strategy in place. This is used for planning and providing the financial groundwork for your projections and plans.

If you are looking to expand your business, you will use business finance to tell you how much you’ll have to spend to get things moving.

These strategic plans help you to determine whether or not your company is meeting it’s long and short-term goals.

Finance

It’s not uncommon to run into cash flow difficulties. When this happens, business finance is a vital tool for managing and understanding your financing options.

By incorporating this information into your financial statements, you can make more educated decisions about how much capital to borrow. You can also decide which options make the most sense and your repayment schedule.

Promotion

It’s all well and good having a great product and business model, but to be a successful business you need people to be aware of you.

The best way to do this is through promotion and marketing. There is a large demand for market research so most of the time this does not come cheap. So it’s important to set aside a section of your fiance to be put towards making sure your product is accessible to your target market.

Key Takeaways

Business finance is key in any business. If your finances are mishandled or poorly managed then you could run into some serious issues further down the line.

That’s why getting a grip on your business finance is a top priority whose importance should never be underestimated.

Are you looking for more business advice on everything from starting a new business to new business practices?

Then check out the FreshBooks Resource Hub.


RELATED ARTICLES