Every successful business requires sound financial management to survive and flourish. Many small business entrepreneurs, however, have little experience when it comes to this area. Many often over-look the strategic importance it has on their business’ survival and performance.
Generally, sound financial management involves procuring the funds for the business and then how they are spent on the business’ various activities. It includes recording numerical data to be analysed to help evaluate a business’ financial health and current financial performance. It also helps to make decisions and take action that will help improve a business’ general financial performance.
Perhaps, a better way to explain this and to demonstrate why sound financial management is essential would be to list some of the activities that it involves:
• Taking care to avoid depleting vital cash reserves by over-investing in new fixed assets that could have be leased, rented or bought more cheaply. Often it may be more prudent to buy good second-hand or cheaper assets rather than buy the latest expensive designer models or equipment;
• Reviewing short-term working capital requirements to ensure that the business remains solvent. Preparing & reviewing regular cash flow forecasts, following up debtors promptly, and keeping a list of unpaid invoices helps achieve this;
• Developing sales targets that are achievable (but not too easily achievable) and that will help deliver growth. Setting these often provides extra motivation as well as see what additional expenses would be required to achieve targets;
• Reviewing existing pricing or charge-out rates for products or services. Businesses often simply over-look that whilst inflation has pushed up costs associated with delivering a product or service they have not passed on increases to customers;
• Improving gross profit margins by negotiating more favourable and managing other activities that directly impact how a business produces and delivers its services or products;
• Looking for more cost-effective ways of carrying out non-core administration and general activities. The emerging trend to outsource accounting and book-keeping tasks is freeing up entrepreneurs’ time and reducing their overheads;
Sound financial management starts by having good accounting and book-keeping systems that record and produce a variety of financial statements. It then requires a level of understanding to turn these numbers into information that will help the business. For example: Increased sales and a net profit may initially look positive. But if business owners have increased their borrowing at rates higher than the rates sales or profits have increased their financial position may have actually deteriorated.
There are countless other mistakes that business entrepreneurs may make if they ignore how essential sound financial management is to their businesses. And over time, they can significantly influence whether a business will survive or not. So it’s essential that a business’ success is not left to chance but as a result of good business decisions, which includes sound financial management.