Finance

What is Finance;

Definition:  The managing  or science of managing money matters. To supply money, credit or capital..

It is really about the money side of business which is broken down into the two key areas of accounting (keeping track of how the money is used) and the financing which is the sourcing of money for the business to purchase things.  See our seed capital financing program to understand about raising money for your business.

You may have heard of a CFO (chief financial officer), V.P. Finance, Treasurer, Controller, Accountant or an  Analyst; these are some of the jobs in the finance area.

Accounting

Definition:  The principles  or practice of systematically recording, presenting and interpreting financial accounts.  A statement of debits and credits.  A settling or balancing of accounts.

Accounting is keeping track of how much money comes in and goes out of your business as you sell things and buy things.  Accounting helps you determine how your money has been spent and the things you have purchased with your money.

Can you imagine if you had ;

• hundreds of cheques being sent out and received by your business, 

• thousands of dollars of cash received at your  store each day,

• money borrowed (given with the understanding that you pay it back in the future) from a bank that you had to pay interest on each month and eventually pay the bank back,

• money borrowed from friends (investors) that you had to pay back,

• money owed to you by people that bought goods from you and said that they would pay you later,

• to ask people for money to build a factory to produce your products,

• to pay people who worked for you,

• to figure out how much money you had after you paid all the bills, so you could take some money to pay for you living expenses,

• to save money to buy something you needed for your business,

• to pay bills for expenses to run your business like hydro, telephone, insurance, building costs, office supplies etc.

• to buy furniture and equipment and other assets that you would need to keep track of.

Hopefully, you can appreciate that businesses need to do a lot of things with their money.  You know what it is like to try and find things in a really messy closet or room.  Imagine if you couldn't find your money you needed to pay for things you needed to buy or if you didn't know how much money you had to pay all the money you owed.

Accounting is the job that is done to make sure you know;

• how you have spent your money  on things used to manage your business (expenses - things that are used up quickly in your business - pens, paper, electricity, telephone long distance etc)

• how much money you have taken in from sales or from customers who have bought your product or service (revenues)

• how much money you owe to suppliers (people or companies you have purchased things from and that you have not paid yet) or the liabilities of your business,

• how much money you owe to lenders (companies - usually banks) who have let you use their money for a charge of interest (usually a payment each month)  and the repayment of the principal (the amount that you owe them) - also liabilities,

• how much you have in equipment and other objects that have a long use or economic life, which are assets (computers, desks, chairs, - assets)

• how much money you are making (profit or earnings),

• how much money your business is worth (equity or the difference between assets and liabilities)

Accounting is a very important part of your business. Your business will not suceed if you don't have good control over how much money; you have, will need and how you are using your money.

Accounting uses an accounting system to record all the transactions (activity) of the business as it uses money and the things that were bought with money.

The term income statement is a report that covers a period of time and summarizes all the revenues (money taken in) and subtracts the expenses (money used) to come up with a difference which is Net Income, Profit or Earnings.

A Balance Sheet is a report at a specific date that summaries the assets (things that have a value), liabilities (money owed) and equity (difference between assets and liabilities). If you were to list the cost your toys, books, clothes etc. and the cost of them you would have a part of a balance sheet.

The success of most businesses is measured by the amount of money they make (profit) and how that relates to the amount of money that people have put into the business.  If someone puts a lot of money into a business to get it started or to grow the business, then they expect to get a lot of money back.

 If you asked someone or a bank to invest a $100,000.00 into a business; it is important that they know how their money was used and how much money it made for them.  

Financing

The financing part of the finance area of a business is to do with getting enough money to do the things that a business needs to do. If you want to buy something, you need money.  If you don't have the money, then you have to borrow it from someone, have them give you money (may happen with your parents but not normally in business), or have someone invest money in your business (to put money into a business for the purpose of obtaining an income or profit - make more money then they originally put in).

People that work in the financing area need to do lots of planning and analysis on the business.  Before you go asking for money, a company needs to have a plan on what the money is needed for, how it will be spent, and how and when it will be paid back.  A business has to tell a story to answer the many questions that are asked when you ask people for money.

There are also many rules when it comes to using other people's money.  The rules are set to protect  people and to try and prevent people from not telling the truth about the way they are going to use the money and pay it back.

Importance of Financing;

Many companies are unable to grow because they are unable to finance their businesses properly. The saying, "it takes money to make money" is often true. It takes money to advertise, to research and develop products, to build additional factories to make more product, to expand your office space, to hire people etc. 

 If companies are not making enough cash flow (money left over) from their business, they will have to find a source of money outside of their business. 

Usually, businesses have to raise capital (money) in the form of loans (money they pay back) or equity (ownership or shares that people hope to sell for more money then they bought them for and to make some money in the form of dividends as they own the stock).

Sources of Finance;

There are many things to consider when a business tries to obtain money. A business has to examine the amount of money they  can raise in a way that they can repay it and manage the requirements or conditions of the people that provide the money to them. 

If a business borrows money from a bank then they have to be confident that they will generate  enough money to pay the interest and principal repayment each month.  If the business borrows that money and then can't pay it back, there are all kinds of problems that start to happen.  The owners of the business can lose control of it and others will take the business over.

If a business feels they can issue equity to raise money, they have to feel confident the people who provide the money will be happy with the amount of money they will receive over time in the form of dividends or from selling the stock at a higher value then their initial investment..

Examples of sources of finance;

• loans from banks, other businesses, friends,

• equity from investors on a stock exchange or private investors like venture capitalists or wealthy individuals,

• suppliers who give you good repayment terms of things you have bought from them,

• government programs,

• Kidse-marketplace.com is using a seed capital financing program.

Steps to take to prepare for financing;

There are many things you have to do to get your company ready for financing. We will focus on some of the planning pieces that have to be done.

• [Executive Summary]  - Is a good starting point to explain in summary form what you are doing with your business.

• [Business Plan] - this is a very extensive report that takes you through many steps in describing your business and planning for the future of your business.

Don't worry about money, at this stage of your business basics development, you should be trying to understand the overall framework of things you will need to consider when the time is right.

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