Financial management might not be the most glamorous part of owning a business, but it is one of the most important factors in the success of it. Get it wrong, and it could mean the death of your entrepreneurial dreams. In part three of the Business Success Series, we’ll take a look at what financial management entails and some of things you need to know.
For a start, it’s a whole lot more than simply bookkeeping. Although keeping accurate records is an important function of properly managing your finances, it’s only one part. Financial management is understanding how your business is performing financially and the reasons behind that performance.
When you know why your business is performing well or poorly, you can take measures to shape future outcomes. Whether it’s managing cash flow, streamlining operations or budgeting for growth, being in control of your financial planning and management allows you to be proactive when it comes to decisions that affect the future of your business.
Having a good financial management system means being on top of not only the day-to-day financials, but also the bigger picture. When you have a solid grip on your financial position, you are better able to:
- Set sales and business profitability goals
- Identify areas for improvement to increase efficiencies
- Maintain working capital needs and maximize investments
- Properly manage expenses and plan ahead for tax, employee benefits and other business obligations
Some of the fundamental areas of financial management entrepreneurs and business owners alike should seek to understand include:
- Business Costs
There are various types of expenses associated with running a business. There’s basic infrastructure and operating costs, staffing, advertising, legal, insurance and of course tax obligations to consider. Having a clear understanding of your business expenses will allow you to not only better allocate capital, but also manage those expenses as well.
- Financial Statements
Knowing how to read a financial statement is integral to being able to effectively manage your business finances. Financial statements should be generated and reviewed monthly to keep ahead of the game. A financial statement includes:
- Balance sheets
- Income statements
- Cash flow statements
- Statements of shareholder’s equity
- Cash Flow & Cash Reserve
Most businesses will experience negative cash flow or losses at some point, with many affected during the startup phase or other major growth cycles. Sharp economic downturns can also affect businesses unexpectedly. Making sure there is enough cash to pay staff and suppliers even during times of negative cash flow is extremely important. Close monitoring can help business owners proactively manage cash flow before it becomes an issue, while creating a cash reserve as a buffer for leaner times is also a smart move.
Setting a budget for your business operations will enable you to allocate funds efficiently – and sticking to it, will ensure your spending is kept in check. Reviewing the budget against actuals is just as important as having one in the first place so that you can see where expenditure differs from your projections, and when modifications are required.
If you are striking out on your first startup or you are already running a small business, there are a number of tools available to help you manage your finances. To learn more about the latest accounting software, check out this five-minute read or a more comprehensive article here.