6 Professional Benefits of Understanding Finance

All too often, a company's finance department is shrouded in mystery. Many employees are unable to explain what the department is, what it does, or how it impacts the work they do.

But the truth is, finance affects each and every person. Finance communicates the overall health of an organization, explains how an individual’s actions impact the company’s success, creates guidelines for future goals and initiatives, and sets meaningful metrics to determine performance across departments.

It’s clear that taking the time to develop your financial skills can benefit you in many ways. Below are six key benefits you can realize by gaining a deeper understanding of finance, alongside three actionable tips you can use to build those skills.

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Benefits of Understanding Finance

1. Learn How to Analyze Performance for Your Department

Financial understanding will give you the tools needed to gauge how well your department is performing, both by itself and as part of the greater company—key insights for anyone in a managerial role. It will help you determine the answers to questions like:

Is your department performing well?

Who should your department be compared against?

What measures and metrics should you use to evaluate and monitor your department’s performance?

Many companies choose the wrong metrics to benchmark and monitor performance, or use the same metric for every department and, in doing so, miss the unique ways in which each department contributes to corporate profits.

A company that measures performance strictly in terms of increased revenue targets, for example, may underestimate or entirely miss the costs of increasing those targets—even as they grow higher than the increase in revenue—or undervalue key employees who provide value and impact revenue in indirect ways.

Once you understand the metrics that matter most to your department, and which appropriately measure your contributions to the company’s finances, you can establish a plan for monitoring them. Armed with this data, it becomes possible to more accurately measure your department's contributions and identify areas for ongoing improvement.

2. Appreciate the Financial Impact of Your Job

On a more granular level, developing your financial skills will help you understand how the work you perform specifically contributes to the financial health of your company—information you may be able to leverage to negotiate a raise, promotion, or increase in other benefits.

Just as every department within a company should provide value to the bottom line, so, too, should every individual position or role. The challenging part of the equation is often in determining how this value can be monitored on an individual level.

If you want to learn more about why you should further your financial knowledge—even if you're in a non-finance role—watch the video below featuring Harvard Business School Professor V.G. Narayanan, who teaches the online course Financial Accounting:

It’s easy, for example, to understand the impact an individual member of the sales team has on revenue goals, because their performance is tied to the amount of revenue they contribute—whether or not they’re hitting their quotas. But how do you measure the value contributed by the IT or accounting departments, which perform important duties, but don’t directly interact with customers?

Every individual makes a measurable impact on the success of the company, and understanding the impact of your job, using the tools of finance, can be the best first step to reaching a higher level of performance.

Related: Financial Terminology: 20 Financial Terms to Know

3. Interact Better With Your Company's Finance Department

Have you or someone in your department ever wanted to pursue an exciting project, only to grumble when the idea is ultimately shot down by the finance team? Have you ever wanted to propose an idea or project, but decided against doing so because you didn’t think there would be any chance of getting approval for funding?

All too often, this is the perception that individuals within an organization have about their finance department: That it’s a group primarily designed to say "no" to promising ideas.

But that perception is far from the truth. One of the primary duties of finance is to determine which projects show the most promise for a positive return on investment, and to prioritize those over projects which would contribute less effectively to the company’s strategic goals. Coming to this determination requires a lot of data and deliberation; decisions are never simply made on a whim.

Equipped with the language of finance and an understanding of the factors the finance department must consider as they evaluate potential projects, it’s possible for you to more effectively communicate and collaborate with them and generate opportunities that add value to your organization.

4. Unlock the True Sources of Value Creation

Have you ever been assigned to work on a project with questionable ROI? There’s no doubt that it’s a demoralizing experience to invest your time, energy, and resources over and over again into initiatives that, at best, have no effect on your company’s strategic goals and, at worst, have a negative impact.

To be effective in your role, it helps to understand how value is created for your business. How do your organization’s key stakeholders—members of the C-suite, investors, the general public—measure value and success?

Finance gives you the knowledge and skills to answer this question and ensure every project you take on will directly and meaningfully contribute to the success of your company. It empowers you to push back against projects that show little chance of success, or offer suggestions that might help pivot a project in a more promising direction—ultimately helping you demonstrate your unique value as a strategic thinker.

5. Know That Actions Tell Stories

Everything you or your company does tells a story that will be interpreted by someone else.

What story are you telling? Are you accidentally sending a signal to investors that hard times are coming? Or are you intentionally ensuring your actions line up with your words and paint an accurate picture of the future of your company? In a world where investors must guess about what goes on inside a company, everything is analyzed. Are you sending the right messages?

By understanding how various financial data and signals might be interpreted by different audiences, you can shape the narrative of the story in a way that would not be possible if you simply allowed the data to speak for itself.

6. Understand Investing and Capital Markets

Business aside, everyone interacts with capital markets in their daily lives, whether they realize it or not.

For example, your retirement fund is likely invested in a pension plan. Your personal investment portfolio is likely managed through a broker, or packaged into a mutual fund. And, of course, the interest rates on everything from your mortgage to your credit card are impacted by the actions of the Federal Reserve, which often takes its cues from larger economic trends.

A solid foundation in financial knowledge can help you navigate the tricky questions that are often related to these considerations. For example, it might enable you to better judge whether an investment opportunity makes sense for your financial goals—whether that be growth, safety, or a mix of both. At the same time, and equally as important, it can show you what people are looking for in terms of investments and how your actions can help to give it to them.

How to Improve Your Financial Literacy

1. Read Finance-Focused Books, Articles, and Websites

If you’re approaching the subject of finance with little-to-no previous experience, your first step should be to establish a baseline of knowledge upon which you can build. One of the best ways of achieving this is to consume content designed and created for financial novices. There are many finance blogs, websites, books, magazines, podcasts, and videos you can turn to learn the basics.

2. Learn on the Job

It’s also possible to learn about finance—particularly how it impacts your organization and role—while on the job.

Quarterly budget meetings, if your company hosts them, can offer insight into the financial health of your organization and the metrics that are important to it.

Asking for more tasks that involve some form of financial consideration can be another great way of picking up skills. For example, developing a P&L for a project you’re working on. Even if it’s not officially a part of your role, consider trying your hand at compiling a balance sheet or conducting a cost-benefit analysis to practice the skills that you want to learn.

Related: 5 Reasons Why You Should Study Finance

3. Take a Finance Course

Once you have a solid foundation of basic financial knowledge, you can further your understanding by taking an online finance course.

Taking such a course will provide you with a deeper understanding of the ways in which financial considerations impact your organization and individual role, which can help you become more effective in your job. Beyond this, it offers a real accomplishment you can add to your resume—which is helpful in the event that you look to transition to a new organization or role.

It’s important to remember: Many organizations offer professional development stipends or tuition reimbursement for employees looking to advance their skills.

Taking the Mystery Out of Finance

Finance doesn’t need to be a mystery. In fact, embracing financial understanding can be the secret to you and your organization’s success.

Interested in gaining a toolkit for making smart financial decisions and the confidence to clearly communicate those decisions to key internal and external stakeholders? Explore our online finance and accounting courses to discover how you can unlock critical insights into your organization’s performance and potential.

This post was updated on September 17, 2021. It was originally published on August 9, 2016.

Business Finance: Definition, Meaning & Importance

4 Min. Read

Business Finance: Definition, Meaning & Importance

Hub Finance 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.

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The Importance of Business Financing

The Importance of Business Financing

3 min read. November, 2021 – by Joe Camberato

Business financing refers to the money needed to start your business, run your business, and grow your business. Cash infusions are critical from time to time and almost every business will rely on financing at some point.

Business financing can take many forms. For example, term loans, lines of credit, Small Business Administration (SBA) loans, and more are all types of business financing. Business financing can be put to a large variety of purposes, but the end goal is always the same – to help your business thrive.

Business financing can also relate to the way your business manages its cash. It doesn’t matter how high your revenue is – if you’re properly tracking expenses or keeping enough capital on hand for a rainy day, you could find yourself in a precarious situation.

We’re breaking down how to understand business financing as well as the different ways to use business financing to your advantage.

Understanding Business Financing: The Basics

Business financial statements provide a synopsis of your business’s finances and overall health. They’re a great starting point to understanding your business’s weak points and where additional financing may be needed. Plus, almost every lender will ask to review your financial statements before approving you for a business loan. So it’s best to be prepared ahead of time.

The three most important business financial statements are your balance sheet, income statement, and cash flow statement.

Balance sheets

Your balance sheet displays your company’s assets, liabilities, and equity. Balance sheets help convey your business’s financial strength. Companies with strong balance sheets are more likely to be able to weather unexpected disruptions to cash flow. Many lenders also view companies with more assets over liabilities as safer, and tend to offer lower interest rates and better terms to these borrowers.

Income statements

Income statements, also known as profit and loss statements, summarize your business’s income for a set period of time – taking into account your expenses and profit. Income statements convey your company’s profitability and potential for long-term survival.

Cash flow statements

Finally, cash flow statements describe your cash inflows and cash outflows. It helps portray a picture of how well your business generates cash as well as the amount of time it takes to receive cash after spending cash. Ideally, you want your businesses to constantly have a set minimum of cash deposits at all times to be able to meet operating expenses.

Keys to Managing Business Financing

Managing business financing means optimizing the way your business handles cash. Here are some important factors to look into when considering business financing.

Operational expenses

At the very least, your business must meet all its operation expenses to stay afloat. This means having enough cash on hand to pay your employees, purchase raw materials or inventory, cover your bills, and so on. You want to ensure you have enough cash coming in to cover these expenses and then some.

Risk management

Just like you want to have enough cash to meet all of your day-to-day expenses, it’s also important to have access to extra capital in case of an emergency. This can be in the form of a cash reserve, savings account, or business line of credit.

Long term goals

The old cliche, you need money to make money, holds true. Whether you’re launching a business for the first time or planning to expand, you’re going to need cash. Make sure to also take the time to consider how your ongoing expenses will impact your plans for growth.

How to Use Business Financing

Cash infusions can help keep your business running while simultaneously allowing you to reach new heights. Additional business financing is critical during the startup phase as well as new expansionary periods. Many businesses also turn to business financing resources to help them resolve day-to-day cash flow disruptions, such as those resulting from delayed invoices, unanticipated expenses, or general economic downturns – like the Covid-19 pandemic.

Here are some ways to use business financing:

Managing day to day expenses, such as inventory purchases, rent, utilities, employee salaries, and more

Hiring new employees

Debt refinancing

A source of temporary cash flow relief – especially if your business was hit with an unanticipated expense or several late invoices

Growth projects, such as opening a new location, marketing campaigns, purchasing raw materials, testing products, researching new markets, and more

Purchasing land or real estate

Purchasing machinery or equipment

An emergency fund – especially in the case of a line of credit, which can be withdrawn at any time to cover ongoing expenses

How to Obtain Business Financing

As a business owner, you have several options for obtaining business financing. You can choose to work with traditional lenders, such as banks or credit unions. Or you can choose to work with online lenders or fintech lenders.

In general, it tends to be more difficult to secure business financing with banks and credit unions. These institutions maintain strict requirements and are also notorious for long, rigorous application processes. It’s not uncommon for businesses to have to wait weeks or even months for cash to come in from a bank or credit union.

Online lenders and fintech lenders tend to be more flexible and work incredibly fast at processing funds. In some cases, it’s possible to secure business financing in as little as 24 hours from an online lender.

If you’re wondering what type of business financing is best for you, make sure to work with National Business Capital. National Business Capital is a fintech marketplace where you can compare personalized offers from over 75 different lenders.

National also gives you the added bonus of working directly with a Business Financing Advisor – a professional who’s dedicated to walking you through the process and helping you find the best business financing solutions for your needs.

Learn more about business financing from National here.