I recently read a statement which really resonated with me —
Financial Management in a Small Business is like Breathing for a Fit person.
Like breathing, financial management should always be done correctly. This allows other key business functions like marketing, operations etc. to operate at their optimal best.
Unfortunately, there is enough evidence to show that this is often not the case. Small business owners are occupied with urgent demands on their daily agendas. Hence, Financial management (FM) is left for the accounting team or an external consultant to handle. Without regular monitoring, this can cause challenges for the owner over a period of time.
It is important that the senior management pays close attention to FM as a core part of the business. Effective FM can help understand costing, pricing, inventory, equipment and, above all, profits.
It can provide the tools to plan for future growth and challenges in a timely and systematic manner. FM is also vital in convincing Banks and Investors to provide loans or equity to fund a business. In short, FM can provide the tools for a successful business.
But what is Financial Management?
Financial Management includes:
2. Book-Keeping through Accounting Systems
3. Cash Flow Analysis
4. Profit & Loss analysis
5. Business Financing through Equity & Debt including Bank Loans
I will provide a brief overview of these topics in this article and will write in-depth in later blogs.
A budget is the simplest tool to get you started with your business plan in any given period of time. Most businesses are served well with a yearly budget broken down into monthly/quarterly figures.
The owner can compare the budget vs actual figures to understand relative performance of the business to take corrective steps. Fresh Books provides a good online resource for budgeting for Small Businesses.
2. Book-keeping through Cloud-based Accounting Systems
A solid book-keeping process is a true foundation for all aspects of FM. Small business owners are increasingly adopting cloud-based accounting systems to stay competitive. It allows access to real-time financials. This saves time on manual data entry which allows a streamlined approach to managing cash flows and operations.
I have used these systems in my own startup companies and found them easy to navigate. These systems allow businesses to store all key financial data. They also produce all the key financial reports for submission to all stakeholders. Some of the more well-known providers in the market are Xero, Quickbooks, MYOB etc., to name a few.
3. CashFlow Analysis
Any financial expert will agree that for small businesses “Cash is King”. A small business owner must understand the projected cash flow for the business. Additionally, they must also compare actual vs projected at regular intervals.
It is key to ensure adequate liquidity to pay creditors and all regulatory dues on a timely basis. Cash Flow analysis allows this. It also forms the basis of “Good credit rating” by all key counter parties. A useful source to cash flow forecast can be found here.
4. P & L Analysis
The key in a P&L Analysis is the margin analysis — gross and net margins. It indicates to the owner if the business is profitable and by how much. This should be combined with “Expense Analysis” to understand the trends for sales, expenses, and margins. It also highlights the corrective action to be taken. It is easy to find some useful tips on P & L and Expense Analysis on the web.
5. Business Financing through Equity & Debt Loans
Finance is the lifeblood of every business and remains one of the biggest challenges the business owners face. How should one raise the appropriate mix of financing for their business to balance between equity and debt? At the same time, the owner needs to manage interest expenses to an acceptable and affordable level. A robust FM plan includes a sensible Business Financing Plan at its core. If you are unsure whether you need great equity or debt financing, refer to my article on financing mix for small businesses.
Take away here is, you absolutely need an FM strategy for your business. An overall effective FM strategy allows the business to thrive and grow on desired lines. It provides the necessary assurance to the internal and external stakeholders including banks, employees, suppliers, and customers.