Finance of commercial organizations is a certain group of economic relations aimed at making a profit or searching for sources of financing. Such relationships are also often called financial or monetary, since they can arise only if there is a flow of money from at least one side. This article will discuss the features of the organization of finance in commercial enterprises, as well as methods for their control and distribution.
A bit about features
So, in simple terms, the finances of commercial organizations is a certain amount of company money that is aimed at making a profit. This definition may mean the net profit of the enterprise, attracted funds from investors, securities and so on. As for monetary functions, it is customary to allocate control, reproduction and distribution:
- With the help of the distribution function, the initial capital is formed, which can be formed at the expense of constituent deposits, state subsidies or credit loans. This function allows you to distribute the initial cash in such a way that they bring in the future maximum profit. In addition, the distribution also affects the moment of receipt of revenue, when you have to divide the net profit among investors depending on the interest on their contribution.
- The reproduction function provides the improvement of the production process and the use of innovative technologies. That is, the company should direct part of its finances to ensure that the company is constantly developing, and the profit is to increase. If this function is not fully realized, sooner or later competing companies will take over the corporation.
- The financial control of a commercial organization is based on a detailed analysis of the work of management personnel and accounting. Control activities are aimed at implementing the financial strategy of the company and preventing crisis situations. If the director of the company does not monitor the cash flow of his business, then sooner or later this will lead to all sorts of shortcomings or absolute bankruptcy.
A competent attitude to these three functions allows you to get the maximum profit from the company and achieve an increase in the number of products manufactured. It is most advisable to appoint an experienced financier to the managerial position, who will monitor the quality performance of all these functions, as well as inform the owner if the company is on the verge of bankruptcy.
What is internal control
Finance of commercial organizations is an uninterrupted cash flow that is used for various purposes. For example, each employer is required to pay salaries to employees from the total profit of the company. In addition, it is necessary to regularly send part of the net profit to the development of the organization. Therefore, it is so important to pay special attention to internal financial control.
First of all, you should hire a qualified specialist who will monitor the status of settlements or payments. As a rule, an accountant manages such responsibilities. He daily calculates the company's profits, pays employees wages based on the number of hours worked, distributes money among investors, and so on. All work is based on the use of certain formulas and programs.
Monitoring the implementation of a financing strategy usually rests with the director or territorial manager. This person must ensure that the quantity of goods or services sold is consistent with the business plan of the management. For this, special motivational programs for employees, special marketing moves are developed, and company expenses and write-offs are kept. In addition, the director of the company is obliged to provide optimal development paths, since it is he who is the middle link between the consumer and the owner of the company.
Five principles of organization finance
In order for an enterprise to generate maximum profit, its finances must follow certain principles. Otherwise, a certain amount of money will evaporate all the time in an unknown direction, and the buyer will remain unhappy due to the fact that the staff moves away from work. However, even the largest company was once at the development stage, but managed to overcome all difficulties by following certain rules. So, the principles of finance of commercial organizations include the following points:
- financial independence;
- financial self-sufficiency;
- self-financing;
- self-financing;
- self insurance.
And these are just the main points that most large companies follow. As you can see, the principles of finance of commercial organizations include five rules that you can immediately understand, perhaps not everyone will succeed. In the following sections, you will find more detailed information about each of these items, as well as a few practical recommendations that will allow you to follow financial principles as clearly as possible.
Independence
The essence of finance of commercial enterprises and organizations in most cases is based on financial independence. It manifests itself in most business entities and is aimed at the formation of a constant flow of resources to maintain the production process. However, a novice businessman should understand that the concept of independence is rather arbitrary. Say what you like, but there will always be some control on the part of government bodies, and certain rules will not allow prices to be set higher than they should be.
Here is a small example of the financial independence of a company that produces the main consumer goods - bread. Initially, investments can be attracted to organize production or credit loans can be taken from financial institutions. However, the company should always strive for financial independence and invest only its own money in development. In this case, most of the profits will remain within the corporation. However, the state will not allow you to set too high prices for food. Otherwise, shops and supermarkets will simply stop working with you.
Financial self-sufficiency
As you already know, one of the functions of the finance of commercial organizations and enterprises is reproduction. Any enterprise should have a certain starting capital, which will allow to organize the production and sale of goods. You can get this amount from the board of founders, investors, the state or the bank. However, any company should strive for independent financial support. And the thing is not even that part of the profits will have to be paid to pay the debt. Simply, any entrepreneur should learn to rely only on himself.
As you already noticed, this principle is quite similar to the previous one, but they still have one significant difference. Financial independence means full control over cash flows (expenses and income), and financial self-sufficiency has only one-sided direction - the money that goes to the company. Following such a principle is sometimes extremely difficult, especially given the constant increase in competition. However, if the company can become independent from others, then this will lead to large revenues.
Self-financing
As you can see, the classification of the finances of commercial organizations is a rather complicated, but very interesting topic. However, this item deserves special attention, since it is precisely it that most large companies follow. Why self-lending? It is not always possible to get a large amount of money from a bank, and the state sponsors business owners very reluctantly. Therefore, you have to resort to a similar method, which shows itself perfectly not only at the development stage, but also in the future.
The simplest example of self-financing is the issue of shares or bonds. The company issues a certain amount of securities to the market that have a nominal value and promise to bring a certain profit to the owner. Received finance from sales can be used for company development or other purposes. However, after a certain time, the owner of the company will be required to pay a certain amount of money to investors in the form of dividends or coupons.
Self-financing
Now you know about the features of the organization of finance in commercial enterprises in more detail. However, if you want to build a really large company, we recommend that you also familiarize yourself with the principle of self-financing, which is not as popular as self-financing, but is no less beneficial for the enterprise.
So, self-financing refers to the use of own funds, which can be received in a variety of ways. The owner of the company simply uses his own savings in order to build the company and how to develop it. This principle of functioning of the finances of commercial organizations is the most beneficial for the company, but is not very popular, since the owner has to use his own savings.
Many start-up entrepreneurs confuse this type of finance with the internal resources of the company. It should be understood that self-financing does not depend on the profit of the corporation, and internal sources are inextricably linked with it. That is why this principle is not very popular, because no one wants to invest their own money in development.
Self insurance
Now you know the definition of finance for commercial organizations (the concepts and principles of organization were described in the previous sections), however, until now, one important nuance that companies can use is not mentioned - it is self-insurance. This principle is a protection against possible losses and losses for various reasons. For example, you can create various reserve funds, which will be replenished from the total profit of the company. Or you can insure money through third-party organizations for a fee.
Of particular note is the provision of compensation in the event of unforeseen losses. If a monetary reserve has been formed inside the enterprise, then these funds are directed to combat the threat that led to the crisis. Of course, the creation of a reserve fund is not at all mandatory, however, such a principle allows you to keep the company’s money intact.
Financial strategies and their tasks
As mentioned earlier, financial accounting can be implemented using various strategies aimed at generating profit from the enterprise. Features of finance of various forms in commercial organizations allow you to build dozens and even hundreds of multi-way variations with which you can achieve your goal. In most cases, strategies are individual, but there are also certain rules for their creation, which should be followed by every entrepreneur.
The objectives of financial strategies directly depend on the goal that the company sets itself. For example, a company may use tactics to analyze its activities or optimize working capital. If the organization needs to get more finance, then the investment strategy is used, the main task of which is to attract the attention of investors. Or you can give preference to a deep study of all areas of the company to invest in the most promising industry. That is, one organization may have several strategies at once - and this is not surprising.
A few words in conclusion
Finances of commercial organizations is a very complex and deep topic, which is important to study not only for a novice businessman, but also for a successful entrepreneur. Below is a short video that describes the basic concepts of corporate finance.
Finance of commercial organizations is a rather complicated structure, in most cases depending on the policy and strategy that the company has chosen. For example, you can put all your strength and money into attracting as many customers as possible to purchase products. However, it is worthwhile to understand that in this case the quality of the goods and the number of satisfied customers can be seriously affected. An experienced financier should be able to competently analyze each industry and compare available resources with global goals. Indeed, the finances of commercial enterprises are economic relations that arise in the process of forming the organization’s production assets and selling its products, forming its own resources, attracting external sources of financing, their correct distribution and proper use.