The Importance of Sound Financial Management Practices

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Well-crafted business plan is a tool to prove viability of your business operations. On the other hand, financial management is in use to point out potential weaknesses, areas for improvement, business strengths and opportunities in that plan, as well as to ensure adherence to it. Measuring past results and projecting it into the future will decide, in normal circumstances, our business decisions and ultimately decide our future results. Unfortunately, prediction based on past outcomes will not challenge us enough and will not produce impossible results overnight. The process alone is slow and demanding and businesses very often lose sight on what is really happening and important. The externalities are so unpredictable, hectic and sudden that you have to do all that is in your capabilities to be on the safe side when bad times arrive. You are the captain of your company and you must take responsibilities that goes with it.

Sound financial management and good accounting practices are the best ways for your business to stay profitable and solvent. How well you manage the finances of your business, its cash flow and profitability is the cornerstone of every successful business operation. Each year, thousands of potentially successful businesses fail because of poor financial management. Bad practices, inadequate records, unqualified advisors, unethical ways, tax evasion etc. are just some of potential problems that you might experience. At the end of the day, we are all humans. Let us face it: it is hard to be focused on what is important, day in and day out. Sometimes challenges are enormous and we cannot decide on our priorities as well as how to address them. As a business owner, you will need to identify and implement policies and procedures that will lead to and ensure that you will meet your financial obligations and make sure your business will have enough working capital once and when needed. By playing in right here, you are increasing the like hold of success.

To effectively manage your financial obligations, plan a sound, realistic (not too optimistic, not to pessimistic), but still challenging budget by determining the actual amount of money needed to open your business (start-up costs) and the amount needed to keep it open (operating costs), running and thriving.

As a business owner, you should be aware of the following:

  1. Why is it important to watch your cash flow? The simplest answer out there would be that you need the money to fund your weekly cash requirements in the way of everyday business operations, business acquisitions, long-term investments and borrowings serviceability. Whatever extra cash available should be parked into high interest earning account that will produce constant returns. In that way, you will be motivated to save and weight your investment decisions, be cautious with your money, take calculated risks and refrain from being tempted to spend it on luxuries.
  2. Your Inventory days are important because you know that slow-moving stock – in other words, not competitive and outdated – cannot bring you funds at the desired level to expand your offerings and grow your operations. It will slow down your growth rate and cut your turnover. Then your business will decline and suffer because of slow-moving sales figures. Please remember, nothing moves in business if there are no sales. If you take actions to accelerate your stock turnover, your cash flow will improve and your business will be in a better place to take up on opportunities when they present themselves.
  3. Your Account Receivables days are critical for various reasons. Firstly, slow paying accounts bring many problems to your business and to you personally. Counting on funds that are not available as promised can be frustrating. In addition, if they are going to be late and you know that your work is already underpriced, it will only add to your pain. There is nothing more frustrating than following on these accounts especially when you know that you and your firm completed the requirements in a record-breaking time and at the highest quality. Others have problems too but they should not become yours! Attempt to take deposits upfront and perform some progress payment practices when you deal with historically slow paying clients. If not successful, consider to release some potential in your business and refer them to other service providers. You cannot be a solution to everyone with a pulse and a cheque book! Set some standards and value what you have and do well! Remember that the first sale in every business is to you!
  4. Accounts Payable Days are as much important as Accounts Receivable Days. Imagine, and there is a lot validation there, that you have slow paying accounts but at the same time very unfavourable credit terms. You are going to be out of the business in no time! Check these days and negotiate them to suit you! There are, with the exception that you are specialised & unique business, numerous suppliers in every industry and they would like to have you on their books. Do not be tied to something that does not suit to your plans. Attempt to negotiate the best possible deal out there!
  5. Other Key Performance Indicators like the number of new customers each month, number of prospects each month, number of prospecting calls you made each month, number of new initiatives you take each month, number of new sales each month, new leads, clicks on your web site, productivity rate, profitability measures, are just as much important and deserve your full attention.
  6. Your Business reporting requirements – accrual or cash accounting as they both have certain benefits and implications. Talk to your trusted advisor as to which is the best reporting cycle in your case and clearly understand your alternatives to choose your preferred options.
  7. You should understand and be financially literate to analyse Profit & Loss Statements and a Balance Sheet Statements and do so every week if possible. I will go one step further and suggest that you must know to get and analyse your financial figures weekly (10 minutes only) and if you don’t you are just risking too much. Once asked what went wrong in his business, Mr Trump responded: “I simply took my eyes of the ball.” You cannot afford not to afford a great bookkeeper, a great accountant, a great financial planner, a great business coach, and other service providers that can add value, complement your skills and extend your competitiveness. You cannot do it all alone without including others in your success story.
  8. A correct pricing mechanism for your products and services is important as it sets your growth rate, structures your profit planning and determines your margins. You must absolutely be clear with this one because it is the most painful one. In addition, you have to decide not to compete on price and not to base your USP on price competitiveness. This is because there will be other competitors in your market that will always outperform you no matter what you do. Once you lose this strategy, you will have nothing left to offer!
  9. Basic Ratio Analysis and calculations like Gross and Net Profit Ratios, Returns on Assets and Equity, Current Ratio, Debt to Equity ratio should become your second nature and the main part of your financial management procedures. Strive for improvements and set up your way of measuring important results in your business. Nothing fancy, nothing complicated, but more importantly done on a regular basis and in the same way!
  10. My final point is about consistency and timing of your procedures. When you attend to your highest priorities on a regular (at least weekly) basis, your chances to create financially stable business operations are improving. This is due to fact that you can act immediately if negative trend shows up in your finances. The biggest mistake you can make in your business and life is to neglect your money. When you are negligent in this area, you effectively hand over control of your financial destiny to others. Remember, no one cares about your financial future and success more than you do and no one can take care of your business more than you can. Make commitment to visit and/or contact your trusted advisors at least once a quarter. Discuss your options, have your mind opened and be ready to take informed decision and calculated opportunities.

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