The Increasing Importance of Sound Financial Management

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.

Sound Financial ManagementGenerally, 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.

15 Comments
  1. Derek Case 5 years ago

    I agree with your comments mark. Good financial management is much more than maintaining accounting records. It is a critical part of line-management duties and must not be perceived as an entirely separate activity to be undertaken by finance staff. It involves planning, controlling, organising and overseeing financial resources to help meet organisational goals.

  2. Joe Burns 5 years ago

    Great post. I firmly believe that that financial management should be included into school curriculums as it would prevent many people falling into unsustainable debt cycles.

  3. I agree with what you said.Sound Financial management if very important. I plan to enter the business world. I am still in the process of studying everything before starting my own business.

  4. Thanks for sharing this article. I am a small business owner. Now, I know the importance of Sound Financial Management. I learned a lot from this article.

  5. We Factor 3 years ago

    Thanks for sharing this. I believe that this article will definitely help a lot of readers undersdand more fact about Sound Financial Management.

  6. Business Cash Flow 3 years ago

    Thanks for sharing this. I want to succeed in my business . I will now study sound financial management thoroughly. I really learned a lot from this article. Thanks for sharing this.

  7. Working Capital 3 years ago

    I want my business to succeed. I will now put attention in sound financial management and study it more. I think that it will really help my business.Thanks for sharing this very informative article.

  8. Now, I think that sound financial management is very important in running a business. I will now make a research about sound financial management and study it more to understand it further. Thanks for sharing these article. I think that information like these help and guide business owner like me.

  9. Factoring Finance 3 years ago

    Thanks for sharing these article. My Uncle who is a small business owner always tells me about to be have knowledge about sound financial management.I did what he said and I realized how sound financial management can be very important to have a successful business. Now, my business is doing great and I gaining more profit.

  10. Factoring Finance 3 years ago

    Great article! I also believe that we should put attention to every part of the business. I believe that having a knowledge about sound financial management will definitely help us to expand our business more. Thanks for sharing this article.

  11. Jenna 3 years ago

    Thanks for sharing this article. I also believe that Sound financial management is really important for a business to have to obtain growth. This article is very informative and easy to understand.

  12. I also believe that having knowledge about accounting and having a sound financial management is necessary for business to have. This article is very informative and useful. Thanks for sharing this article.

  13. We Factor 3 years ago

    Yes, I totally agree with what you said. I believe too that sound financial management is needed for a business to grow. This article is very helpful. I will definitely share this article to my business owner friends.

  14. Nova Business 3 years ago

    I totally agree! I also believe that a business should have a sound financial management in order to succeed. This article is very informative and useful. Thanks for sharing this.

  15. Debtor Finance 2 years ago

    I also believe that sound financial management is definitely needed for a business to succeed. I think that it will definitely help to handle the finances of the business well. Thanks for sharing this article.

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