Business Finance Explained: Key Terminologies & Understanding Cashflow
Navigating the world of business finance can often seem daunting due to the complex terms and concepts involved. However, understanding these financial principles is crucial for anyone looking to manage a successful business. It’s time to demystify the essentials of business finance, focusing mainly on understanding cashflow, a fundamental aspect that impacts every facet of your business operations.
Basic Financial Concepts
What is Business Finance?
Business finance refers to managing money and other assets in a company. It is the art and science of managing funds to ensure a business achieves its objectives and maximises its value. Central to business finance is understanding cashflow, which is essential for maintaining the liquidity needed for day-to-day operations.
Capital: Debt vs. Equity
Capital in business finance is primarily categorised into debt and equity. Debt involves borrowing money that must be repaid over time, with interest, which directly affects your cash flow. Equity involves raising money by selling interests in the company, which doesn’t require repayment but may dilute ownership.
Assets and Liabilities
Assets are resources owned by a business expected to bring future economic benefits. Liabilities are obligations that drain resources, including cash. Effective asset and liability management helps optimise cashflow.
Revenue vs. Profit
Revenue is a business’s total income, while profit remains after all expenses have been subtracted from revenue. Understanding cash flow involves monitoring how revenue and expenses affect your financial health daily, not just at profit levels.
Understanding Cashflow
What is Cashflow?
Cashflow represents the total amount of money transferred in and out of a business. It is crucial for assessing a business’s liquidity and overall health. Positive cashflow indicates that a company’s liquid assets are increasing, allowing it to settle debts, reinvest in its business, pay expenses, and buffer against future financial challenges.
Components of Cashflow
- Operational Cashflow: Money generated from core business operations.
- Investment Cashflow: Money from buying or selling assets.
- Financing Cashflow: Money from transactions involving equity and debt.
Cashflow Management
Managing cashflow effectively requires careful monitoring of cash inflows and outflows. Strategies include speeding up receivables, delaying payables without jeopardising supplier relationships, and maintaining reasonable credit control.
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Advanced Financial Terms
ROI and EBITDA
Critical metrics include return on Investment (ROI) and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). ROI measures the profitability of an investment relative to its cost, while EBITDA provides a clear picture of a company’s operational performance independent of external factors. Both impact understanding cashflow.
Liquidity Ratios
These ratios, such as the quick and current ratios, measure a company’s ability to cover its short-term obligations with its most liquid assets. They are vital for maintaining a healthy cashflow.
Download our latest report: The future of cashflow
Download our insight report, “The Fight Against Slow Finance: How Pre-Approved Credit is the Secret Weapon for UK Businesses,” to dive deeper into the challenges UK businesses face and discover how multifi is revolutionising the world of business finance.
Our report includes:
- Identification of financial gaps and the impact on SMBs.
- Strategies for managing cashflow effectively.
- The benefits of pre-approved business credit.
- Real-world case studies and success stories
Financing Options for Businesses
Businesses have multiple financing options, from traditional bank loans to modern fintech solutions. Each choice affects a company’s cashflow differently. For instance, debt financing can strain cashflow due to mandatory debt service requirements, whereas equity financing might ease cashflow pressure but dilute ownership.
Practical Tips for Financial Management
Budgeting and Financial Forecasting
Budgeting involves planning future spending to support strategic objectives, while financial forecasting predicts future financial states based on historical data. Both practices are crucial for effective cashflow management.
Common Financial Mistakes to Avoid
Mistakes like underestimating operating costs or poor debt management can lead to cashflow problems, potentially crippling a business. Proactive management and an understanding of cashflow can mitigate these risks.
Frequently Asked Questions About multifi:
Who is multifi for?
multifi is a fast, flexible source of business finance for all UK companies. We support everything from retailers and restaurants to manufacturers and professional service firms. Businesses use multifi to bridge short-term cashflow gaps, invest in new opportunities, and more.
How much can I borrow?
We will approve your business for up to £200,000. Your credit limit is based on factors like revenues and cashflow.
Are there any commitments?
It’s free to apply without obligation. If approved, you only proceed once you’ve reviewed your offer. We may, in some cases require a personal guarantee.
Do you charge fees?
We believe in transparency. There is no sign-up fee. The only costs are a monthly fee of 0.3% of your credit limit, and a 1.99% interest on used credit per 30 days. There are no hidden fees and no charges for early repayment.
How do I make repayments?
To make a repayment, simply ensure you have sufficient funds in your Business account when repayments are due for both your monthly platform fee (0.3% of your credit allowance) and interest fee (1.99% of used credit). If you are making a capital repayment, simply make a payment from your Credit account, ensuring there are sufficient funds in your Business account.
What if I miss payments?
Contact your advisor immediately if you anticipate difficulty with repayments. We’ll try to assist you in getting back on track. Missed payments may impact future eligibility.
What kind of businesses are eligible for credit limits?
Our customers are typically businesses looking to generate cashflow and grow.
Minimum criteria include:
- The business is a limited company and must be registered at Companies House.
- The business has traded for at least two years.
- The business should have a positive Net Tangible Asset position.
- The business and its directors must have no outstanding County Court Judgements (CCJs).
- The business must not trade in a prohibitive industry.
Full eligibility criteria can be found on our support page.
Understanding cashflow
Understanding cashflow and other financial terminologies is not just theoretical but integral to the practical management and success of a business. With a clear understanding of these principles, businesses can not only survive but thrive in competitive environments.
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