Small Business Financing Basics
Finances is a broad term encompassing things about the science, development, and allocation of funds. It includes all the financial dealings between individuals, organizations, governments and other entities. The field of finances deals with the measurement, interpretation, and application of financial resources. Finance has been called the “language of finance” because it can speak many languages, including the language of banks, investors, lending institutions and the governments that create the rules that govern the use of these resources.
Basically, economics considers the use of money to be the main economic activity. Money, unlike goods and services, cannot be produced nor bought; it must be acquired, and that process involves the exercise of demand and supply principles. Therefore, the supply of funds is normally fixed, although changes in the economy over time may lead to changes in the regulation of this supply. The concept of finance is closely related to the concept of economics; however, the two cannot be said to be identical. While economics uses supply and demand principles to examine how different economic activities affect the supply of funds, finance looks at how various decisions made by individuals or organizations affect the distribution of funds in the economy.
There are three main subcategories of finance: risk-takers, producers, and consumers. Each subcategory has its own techniques for creating and managing finance. The three subcategories also have a number of different ways of measuring finance. Within the three main subcategories, there are many different types of finance, including financial systems, government finance, private finance, and banking finance.
The practice of accounting is the study of financial transactions, both as they occur in the real world and when reports are prepared for management. Accountants provide information to businesses and individuals about financial transactions by drawing on various forms of accounting. While bookkeeping may not seem important to some, accounting is an essential part of the process of conducting business. Not only must it be accurate, but it must be reliable enough to influence managers so that business decisions are made according to the information derived from accounting.
Financial accounting focuses on the recording, measurement, interpretation, reporting, and decision making of financial statements. As you may have guessed, financial accounting deals with recording financial transactions, both as they occur in the real world and when reports are prepared for management. Examples of financial statements are income statements, balance sheets, and statement of cash flows. Financial accounting focuses on three primary areas: internal control, external control, and risk management.
Small businesses usually have little need for sophisticated finance equipment, especially since most small businesses rely on their own internal control to manage their finances. Internal control refers to those activities of a company that are designed to ensure the protection of assets, inventory balances, and related activities. External control refers to those activities by other companies that can affect a company’s financial performance and reputation. In addition to being an essential part of small business finance, accounting focuses on these three areas to ensure that all company expenses, both financial and non-financial, are recorded, monitored, and reported.
