Business management often requires individuals to have a wide knowledge on business topics. A common business function is finance. This is responsible for providing analysis on financial information and business operations. While larger organizations often hire a financial manager to complete this function, smaller businesses usually rely on the owner or manager for this responsibility. Many companies create finance policies and procedures for setting basic finance standards.
Loan Terms
Loan terms include the interest rate, loan length, collateral agreements and other information specific to the loan. Business owners, directors and managers often require certain loan terms for each type of financing used in their company. These policies ensure companies do not get stuck with unfavorable debt instruments that create negative cash outflows for business operations. Small business owners may also be required to put their personal wealth or assets in consideration for obtaining a traditional bank loan. These personal agreements ensure banks will be repaid for the loan if the small business venture fails to succeed in the business environment.
Equity Terms
Another common finance policy regards equity investments. Equity investment terms are usually created by forming a written contractual agreement with a venture capitalists or private investment firm. These written agreements are usually based on specific economic conditions at the time of the agreement, Equity terms include the amount of capital invested into the business, expected interest rate of return, length of the investment and other items. Venture capitalists and private investment firms might require a say in management decisions when making business investments. A management stake can allow investors to provide guidance on how companies should choose expansion or new business opportunities.
Cash Flow Management
Companies often consider the effects business financing has on operational cash flows. Cash flow management is an important finance procedure, especially for smaller businesses. Companies often struggle with cash flows at various times during business operations. Using copious amounts of business financing can create high fixed cash outflows that may not be delayed if the business fails to generate enough cash. Established businesses often compare additional cash outflows from external financing to current cash inflows. This ensures new business opportunities increase cash flows and do not create a drain on the company’s financial resources.
Tax Planning
Business financing typically affects a company’s business tax return. Business owners, directors and managers are often responsible for creating a finance procedure for tax-planning purposes. Companies might be able to deduct interest paid on bank loans, depending on their business operations, type of loan and taxpayer status with government agencies. Deducting interest payments usually reduces a company’s tax liability. Small businesses organized as a sole proprietorship, partnership or S corporation use flow-through taxation, which allows business profits to be taxed at a personal income tax rate. Personal income tax rates are usually lower than corporate tax rates.
