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Financial management is indispensable for any company of any size. Proper financial management is crucial, whether you are a new business owner or have been in business for a while.
As a small business owner, understanding your finances is essential to running your business. It is easy to get bogged down in day-to-day management and neglect the financial side of things: don’t let that happen.
Running a business is a 24/7 job, but that doesn’t mean you must constantly think about it. Your business is like a living, breathing unit that needs proper care and feeding to ensure a smooth flow.
Financial Management
It is vital to understand what financial management means clearly. The best way to do this is to understand the three main components of the process – financial planning, budgeting, and reporting.
Financial planning means understanding how much capital your entrepreneurial initiatives and projects require and how much money will flow back to finance them. Budgeting determines how much will be allocated to projects and initiatives in the coming financial year, thus giving life to the financial plan. There is no single way to manage corporate finances. Financial reporting keeps track of where your money is going and can serve as evidence of having more control over your cash, making changes throughout the year and regularly reviewing your budget.
So, what’s the best place to start?
I have listed the components of financial management in a logical order: you define your strategy, examine various initiatives to implement it, select the best ones, budget for them and track and report them.
Your financial plan and budget are inextricably linked to your strategy, and both require a good understanding of how you spend your money. I recommend starting with financial reporting.
You must control your finances and do everything possible to ensure your business thrives. Start by monitoring and reporting monthly expenses and revenues in your company. It is easy to gain visibility and control how you spend your money. You can find out how much money you earn from different income streams in your company and how much you spend on each. Knowing how much you pay in each area helps you make more rational decisions about where to invest in the next project or initiative.
The Importance of Financial Management
It is not just a question of managing revenue and expenditure; it’s also about helping you understand how to adjust your overall spending. Because of the importance of your company’s finances, you must keep an eye on things throughout the year. It means remembering to pay your suppliers, putting money aside for taxes and keeping an eye on your spending.
You can automate some aspects of your cash flow to streamline your financial management process. It may seem a little overwhelming, but keeping track of your finances is simple; it is just a matter of dividing them into easy-to-understand categories. You can create a list of bills you pay each month, check your bank accounts, and spend.
For example, one of my customers in the manufacturing industry recently switched from shallow knowledge of income and expenditure to monthly monitoring of the profitability of its customers.
As you can imagine, this is very powerful and can boost the ROI quickly. The more you do it, the stronger the urge to do it.
Whether you run a micro-business or an established SME, there are many tools you can use, but spreadsheets are everyone’s original sin. Try to avoid it!
What to do to improve your financial management
Everyone knows cash is king.
Financial management provides information to help you make the necessary decisions to run your business. It is the number of dollars you have taken, how much you need to spend and how much you need to raise to pay the bills and remain profitable.
As your business grows, you will raise money from your friends, family, VCs, and financial institutions. Another way to grow a business is to manage cash flow.
Companies must spend better, not less, and can achieve it by managing the so-called cash-operating cycle. It means understanding how, e.g., the payment terms you agree with your customers and suppliers or your stock size might impact your cash flow.
Businesses that don’t manage the cash-operating cycle constantly feel they’re running out of money, negatively affecting their spending propensity. Not having control over their cash makes them try to avoid paying, ultimately causing self-harm and limiting their expansion.
It can be challenging to reach out to your customers and let them know that the 60-day payment terms are now 30 days; it can ruin the relationship and force you to give a discount. So, I would start by looking over what you buy.
For recurring purchases, even if you buy small quantities, you can set up a process to keep, for example, 3-6 months of stock for each product. For more strategic purchases and larger quantities, you can renegotiate prices and terms of payments with two or three key suppliers or find an alternative.
In this way, you improve your margins, keep your suppliers in fair competition, reduce inventory without impacting your customers, free up cash and increase turnover.
Conclusion
Making your finances work for you is only part of running a successful business. Look for financial management tips and see if you can integrate them into your business so you can do more.
Please read the full article on Finance Derivative
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