The success of small business involves the how well the basic financial ethics and concepts are grasped and practically used in the business, as understanding the broad spectrum knowledge the financial domain has is the most favorable way to apply them into the new business and gain success in any new venture.
In simple terms the amount of cash coming into the business, against the number of expenses incurred to run the business gives the difference between them, the higher the revenue coming into the business, as against the expenses gives a healthy financial position of cash in the business, and the lower the revenue earned the high amount of expenses indicate an unhealthy cash flow which has to be looked into, the ratio can be calculated after incurring all the expenses for the month in actual and then calculating the ratio
Risk and reward go hand in hand, those who are willing to take calculated risk with a good existing line of business are bound to find success in every venture they handle, since there is some amount of certainty and credibility which the business would have it can think of growing vertically or horizontally like adding a new product or moving into a bigger work facility.
- Understanding whether Equity or Debt way of financing the business is viable, in case of debt financing, which has to be repaid like a bank loan, equity financing is for people who may have to relinquish a part of their business to others, or investors have a right in the business as they fund in the capital requirements for the business.
- Matching the opportunity cost with the newly expanded area of operation and the sales revenue generated from this additional unit is how the opportunity cost gets added into the business financing, if the revenue from the additional value add is more than the cost incurred it is a profit for the business after considering the debt to be repaid, if the cost is more than the additional revenue earned then the option has to be closely monitored.
The above are essential business finance concepts which are important for business owners to completely understand and run the business profitably, there is an increasing number of entrepreneurs who are taking a financial literacy test to improve their knowledge to current and understand the in-depth concepts which emerge from the balance sheet of a company.