Entrepreneurs of both big and small businesses need to learn about business finance. They can gain a complete understanding of the topics as the businesses progress, but they should know some basics beforehand. This Macropay review will explore the basics of business finance that all entrepreneurs must know.
Business finance is a massive topic. Like everything else, everyone should start with the definitions of fundamentals that are useful for quantitative and qualitative analysis of businesses. These are:
- Asset: Assets are tangible and non-tangible aspects of a business that brings value. The value of tangible assets, like cash, property, machinery, and inventory, are easy to quantify, whereas valuing non-tangible assets like talent and intellectual property can be complex.
- Liability: Liability is all type of debts, including loans and lines of credit, owed by a business. Business owners must pay these debts with the agreed-upon interest and time frame.
- Sales: The total proceeds brought in by a company from customers directly by selling products or services is sales.
- Revenue: Revenue is the income of generated from core operations before considering the expenses. It can be the same number as sales for a service-based business, but usually varies for a product-based business.
- Profitability: Profitability is the funds available to a company after subtracting liabilities from assets. Even if a business is profitable, it can invest the profits further into the business, thus bringing down the net figure.
- Cash flow: The amount of money a business generates and spends is termed as cash flow. Money can come into the business from sales and go out with expenses like production costs, salary, and rent.
Investments are the capital entrepreneurs raise to run (or expand) their businesses. Entrepreneurs can bring investment in many ways, but the primary two types are selling equities and adding debts.
Entrepreneurs allocate equities of their businesses in exchange for investments. Basically, they are bringing in more owners. Some equity funding ways are:
- Bootstrapping: A bootstrapped company does not seek external investments. The entrepreneurs back the business with their own funds. These businesses usually have a strong cash flow.
- External funding: Most businesses seek outside funds from angel investors or venture capitalists. With this funding type, the entrepreneurs dilute their stake in the company.
- Crowdfunding: Some entrepreneurs even seek a small amount of investment from a large number of investors, called crowdfunding.
- Going public: If a business is big enough, then going public is the ultimate goal. An initial public offering (or a few other measures) allow the company to list its stocks on public exchanges.
Entrepreneurs also raise money without selling equities: it is done by adding debts. It can be for a short, medium, or long term. Some debt instruments are:
- Bonds or debentures: Businesses can issue bonds or debentures for the long-term (5 years, 10 years, or more), guaranteeing a fixed interest rate to buyers.
- Loans: Entrepreneurs can also approach banks or individual investors to secure loans with specified terms.
- Line of credit: Entrepreneurs can establish relationships with banks or other financial institutions for access to a pre-agreed borrowing limit that can be tapped at any time.
There are several other simple and complex investment instruments that many entrepreneurs resort to for access to funds.
All businesses have to prepare and submit a few accounting reports to authorities at scheduled intervals. These generally show the condition of the businesses. There are three important reports:
- Balance sheet: The balance sheet shows the overall performance of any business. It has two columns: one states all the assets, whereas the other lists the liabilities (the final figure of both the columns should match).
- Cash flow statement: The cash flow statement provides a comprehensive picture of how cash flows in and out of a business. It can help entrepreneurs to manage the resources efficiently.
- Profit and loss statement: The profit and loss statement shows overall income and expense of a business. It finally determines if the business turned a profit or a loss for the particular reporting period.
Macropay Review: Helping Businesses
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