What Is the Role of Business Finance?

The role of business finance can be explained by stating that finance is the essence of business. It is the driving force behind a business, and no business could start or even survive without it. The reason why prospective entrepreneurs look for startup capital is because the business will not take off without any finance. Finance allows the entrepreneurs to buy equipment, acquire office space, set up a production plant, pay suppliers for raw materials, pay for the transportation of goods and services, employ labor, and pay the salaries of employees.

The ability to make an effective financial forecast is an important role of business finance. It gives the business financial analyst the opportunity to make a calculated prediction of the financial direction of the business based on the study of a compilation of the business financial trend. Making accurate financial forecasts gives the business the tool it needs to make budgets and to engage in good strategic planning. If a business knows what the financial status is most likely to be at a certain point in the future based on collated indexes, it can make plans for expansion and other growth-related actions. If the financial forecast is not very promising, the business may be forced to take some measures to mitigate the effect by drastically cutting down on its expenditure or even laying off staff to save costs.

Another component of the role of business finance is the fact that it gives a business a tool with which to assess the progress of the company. A calculation of the inflow and outflow of finance with the aim of calculating the profit and loss will give the business a yardstick with which to measure the level of progress it is making, if any at all. If the there is a consistent showing of financial loss on the balance sheets, the business knows that it is not making any progress. If the balance is showing a profit, then the business knows that it is progressing. It will also know by what percentage it is progressing or retrogressing by calculating the balance in its accounts at the end of each business cycle.

Also, the role of business finance is to allow people with business ideas to move their concepts from mere ideas and plans to a reality. This is due to the fact that finance is literally the life of business. An individual may have the best business idea in the world, but without the finance to execute the idea, it will always remain a dream. This is why people with excellent business proposals but no capital usually look for loans, investors or backers to provide the finance needed to execute the project.