Business finance, commonly known as corporate finance in the business world, is the function responsible for allocating resources, reviewing debt and equity financing opportunities, creating economic forecasts, and various other functions. Small businesses may not have significant corporate finance departments, because their financial needs are generally much less than large businesses. Small business owners can also rely on outside advice regarding business financial decisions.
The most common types of business financial formulas include net present value, payback period, return on investment, and similar mathematical formulas. The net present value estimates the future cash flows of business situations and discounts to the present value of the dollar. The payback period formula is a basic calculation that divides the initial capital outlay by the number of months it will take the company to replenish this amount. The return on investment carries the total return on the investment minus the investment costs, divided by the cost of the investment.
Business finance often uses statistical or mathematical formulas to create financial results related to business information. Business owners can use internal or external business information in companies’ financial formulas. Internal financial formulas generally refer to maximizing production and eliminating waste from the business operation. External financial formulas often present business owners with an economic review of the market and potential business opportunities.
Business finance formulas provide owners with specific information related to return on investment for various business operations or new growth opportunities. These formulas help entrepreneurs compare the total cost of each business decision and the potential benefit each one offers to the company. Business owners will be able to set a minimum percentage of return when making business decisions. Setting a higher minimum profitability percentage can allow companies to include a reserve fund to ensure that the company achieves maximum profitability.
Business owners can choose to implement business or accounting systems that help quickly and accurately carry out a business financial analysis. Many business systems programs require basic data entry from the business owner. Once this function has been completed, the business software will use pre-configured formulas or custom formulas created by the business owner to calculate business financing formulas. This allows business owners to create multiple formulas using different business scenarios and ensure that they make the best possible decision.
Business owners should not rely solely on corporate financial formulas to evaluate new growth opportunities or make business decisions. Using qualitative analysis can help business owners complete the decision-making process. Qualitative analysis uses an individual’s personal knowledge and experience when evaluating business decisions and decision making. This additional analysis often presents a more comprehensive business analysis and can create a higher comfort level when business owners make decisions.