Why finance management is important for every business?

What Is the Importance of Financial Management?

Here is the thing. A startup whose management has adept financial management skills has a head start in business. Indeed, company financial tasks require someone with a clear vision and strategy on how to achieve them. Unlike front office tasks, financial planning is about looking at the complexity of a business enterprise and coming up with a clear roadmap that can be relayed to the rest of the team to achieve success. Then, how can financial management transform your startup? Here is a quick guide:

Understanding Financial Management for Small Businesses

Financial management is about understanding how to plan, organize, direct, and control the company finances. That is, how do you apply your management skills to procure, allocate, and manage the financial resources?

Now, most small business owners are not accountants. And, they don’t have to be one. But, they ought to know how to handle their finances well. Hence, they may have a great idea that has great revenue potential. But, they may lack skills to convert their ideas into financial streams. For sure, the skills gap partly explains why up to 80% of startups never make it past the first 18 months in business.

Importance of Financial Management to Startups

Three key areas of financial planning apply to a small business. These are:

· Investment Decisions – Capital Budgeting and Cash Flow Management

Here, the corporate manager needs an in-depth understanding of capital budgeting. That is, evaluating both the long term and short term investment opportunities for the best returns. First, the manager identifies potential opportunities that can turn into viable investments and projects. For example, a new regulatory move that touches on competitor supply chain can open up new markets for the startup. Hence, the corporate manager ought to know which capital acquisitions are appropriate for such an opportunity.

Next, the business owner should know how to manage his cash flow, which is the lifeblood of any business.

Here, he has to rely on scientific methods to project and meet cash flow demands as they arise. In particular, it is about going with the best-case scenario, while having contingencies for a worst-case scenario. A typical cash flow analysis relies on realistic industry data that results in precise forecasts. Hence, the entrepreneur should have adequate audited records of past financial data for the projections. Each investment decision should pick a project with the highest cash flows and minimal costs.

Note that capital budgeting and cash flow management are vital aspects that call for a manager with appropriate financial skills. In turn, an entrepreneur with no accounting or financial background should never hesitate to hire personnel that have such abilities. Or, the business owner can seek consultancy services on the crucial aspects of the business.

· Financial Decisions

Financial decisions refer to the avenues that the entrepreneur selects to fund his business. For example, should you settle for equity or loan funding? What is the cost of finance for your projects? Plus, can the business cope with such payments as they materialize? Plus, your ultimate financial decision will affect the company’s cash flows.

A small business faces five vital financial decisions as follows: –

1. How much cash must you have to run the business?

A stable business should have sufficient cash to run its operations for the next 12 to 15 months. These funds take into account the net burn rate. That is, what is left after deducting all the expenses from the gross revenue. Second, the manager should determine how long it will take to obtain a replenishment of the current cash level.

2. How will you source for your working capital?

Typical working capital sources for a startup include funds from friends and family, investors, or crowdfunding platforms. A startup may find it hard to secure funding from traditional sources like banks. For, in its formative years, such a business lacks the collateral or proof of credibility to secure loans. Plus, opting for an unsecured loan may come at an immense cost that can cripple the company’s operations.

3. Should you hire employees or outsource the duties?

An employee who understands what is personal finance is better equipped at managing the company’s resources. A prudent business owner delegates non-core duties so that he can concentrate on steering the business towards rapid growth. Hence, as the company achieves its milestones, you may want to invest in trained staff who can execute the duties efficiently and effectively.

Still, the entrepreneur should consider those non-core duties that are time-consuming, yet they are accessible via outsourcing at an affordable rate. Such tasks include customer care management, social media management, and accounting tasks. Outsourcing brings in a fresh pool of skills that is from the broader industry. Plus, it enables the small business to tap into the latest technologies that are too expensive if he had acquired them for his business.

4. Do you have a contingency plan and fund?

As the business moves from the pioneer stage to an established enterprise, the company should be able to manage the risk factors facing its operations. In particular, every entrepreneur should maintain adequate funds to cater for emergencies.

Do your adequate insurance coverage for your business operations? A solid contingency plan will include adequate cover for damages due to unforeseen events. Typical insurance policies for a small business include auto insurance, property insurance, business interruption insurance, and worker’s compensation insurance.

5. What fraction of your revenues should you allocate to sales and marketing?

Finally, sales and marketing is a vital driver for revenue. Businesses should allocate sufficient cash to support their marketing activities. Otherwise, there will no more funds coming in for the rest of the business operations.

· Dividend Decisions

Finally, financial management concerns how the manager distributes the net profit amongst the shareholders and investing back into the business. A startup in its formative years will aim for financial stability, rather than dividend distribution. Hence, most of the profits are reinvested to finance company growth.

Note that not all SMEs pay out dividends. Hence, every business owner must have a dividend policy that is a reflection of the current financial needs of the business. Typical dividend policies for a small business include special dividends, cash sweeps, and smoothing.

The Verdict

In summary, here are the key benefits of having a sound financial management system in one’s business:

  • The company is always one step ahead of the competitions.
  • The management can plan and acquire the needed funds in good time for their current and future projects.
  • Front line managers can monitor the cost centers, ensuring that they stick to the actual cost budget.
  • Organizations can make informed decisions that bring in high returns for investors.
  • Companies will have a reliable roadmap that will help them to remain sustainable and profitable for the long term.
  • The company’s net worth will grow faster due to the management’s expertise and experience.
  • Financial management helps startups to stabilize in the shortest time possible.
  • Employees who exercise their financial management skills will have a better grasp of what is personal finance and apply these skills to manage their personal finances.

Conclusion

Sound financial management policies are crucial for a business that wants to be efficient in its operations. Here, the data analysis involved goes beyond punching in numbers. The management must standardize its organizational processes for better visibility and growth.

FAQ

What does a financial manager do on a daily basis?

A financial manager has a huge amount of responsibilities, providing financial guidance and support to a company. Equally, they research, evaluate, or process loan applications. They also have to administer the numbers and income statement along with a financial analyst.

 Another daily basis includes:

  • Coordinate, approve or reject lines of credit or commercial, personal loans.
  • Book and direct the activities of workers in branches, offices, or departments of the company, such as credit department, branch banks, risk, and insurance department, and others.
  • Prepare financial reports requisite by directors, laws, regulations, etc.
  • Supervise the cash flow or financial instruments.
  • Assists to an individual or business customers with problems these may encounter in its environment.
  • Analyze or acquire information to evaluate the current or future financial status of firms for the company’s financial goals.

What are financial management skills?

Nowadays, there are necessary skills for a business transformation. Although, a prosperous business requires considerably more than curriculum vitae, courses, degrees, and job experience. As a matter of choice, it calls for professionals seen passionate, effective, motivated, and visionary. Some vital skills are helpful to conquer common challenges in financial management, like: 

  • Analytical role: the capacity to see beyond the in plain sight. Also, a flexible open-minded to have the ability to adapt to changes with all speed, alert to the opportunities that emerge from the agency. This skill will allow managers to assume command over ideas, tactics, and actions to shape strategic financial management.
  • Risk management: the faculty to manage uncertainty scenarios that warn the agency’s stability and health. This one will help to assess the grade of risk and improve the necessary plans to mitigate it.
  • Negotiation strategy: the power to negotiate facilitates the development of dynamic alliances and relationships with every one of the stakeholders. Such as partners, customers, associates, and others. At the same time, this quality help increases the growth of the financial future.
  • Ethical communication: the financial director must have a strict, integral, and unbreakable ethic code, an indispensable condition, since the finances of the organization rest in his or her hands.
  • A tactician: thinking strategically and acting tactically is essential for financial performance. Even learning from mistakes, this quality will help to gain experience in the business, which is developed through practice and not the theory in this case.

Living in a dynamic world means experiencing changes day by day. Everything around is in constant evolution, and so is the role of a financial manager, who does not escape from this reality. Financial management skills go beyond executing administrative tasks, balance sheets, and numbers. Its role transcends finance itself, its influence acts as a “generator of opportunities” in strategic decisions. That’s how a business can experience a transformation, in a changing world they can keep up with changing markets. 

What is the financial management major?

Careers in business finance, accounting, or economics on many occasions require a major. The Financial Management Major is particularly considered to arrange students for careers in corporate finance, management, and investment. This education involves students to accomplish core business studies in subjects like finance, economics, accounting, marketing, management. The mission of this specialization is to emphasize analytical abilities and knowledge of financial analysis methods and technology. Also, students may learn about portfolio management, financial accounting, global finance, wealth management, and risk management, in conjunction with organizational behavior, plus leadership. This reflects the progressive intricacy of global trade, changes in federal-state laws and regulations, and the proliferation of complex financial instruments.
 

Why are major risks in the business plan?

In the business world, several external factors might attend against the current and future plans of the corporation. The finance manager can always scheme a good decision, still and all, risk factors could emerge in any scenario. These factors are also known as threats since they could loom the business’s success, and in dangerous conditions even its survival. For example, the value of the firm raises as the revenues and profits of the business raise. In this case, the risk factors alert the investor to the fact there is always a turn to mislaid part or all of the capital deposited into a business.

When it comes to the implementation of a business plan, the content is the key. If people do not apply something, they have in their business plan, it will surge some undesirable consequences. So, a great idea is the creation of a contingency plan, also called “what if” analysis. The business owner can change their marketing strategies, operations, and financial management to prevent a major risk. All things considered, investigating risk factors permits the management group to be assertive it is ready for any business scenario the company might be faced in the upcoming year and beyond.

What are the 10 principles of financial management? 

  1. Organize Your Finances: business prospers means organizing finances. From credit cards, bank accounts, personal loans, etc.
  2. Less Is More: Iearn to track commerce finances and knowing where the firm spend the most, will facilitate the capital’s control.
  3. Capital Structure Formation: looking into this structure, an investor can understand the pattern of finance’s organization.
  4. Understand Risk: The key to understanding return on investments is “the more you risk, the better the return should be.”
  5. Increasing Cash Flows: forecast the cash flows and operate the cash based on requests.
  6. Diversification Control: the formation of a portfolio serves to diversify investment and borrowing, which improves financial control.
  7. Expand Benefits: as a collective benefit, the company must take an appropriate insurance plan.
  8. Attention to Taxes: having a financial plan supports directors to succeed in tax information.
  9. Plan for the Unpredicted: multiplying wealth’s sum makes savings, when times are splendid can help the company to manage the capital market, which facilities to financial instruments transaction in the long-term.
  10. Financial Decision: as a cycle, sometimes you are on the top or you are down. When a financial decision is made, consider the current position of the commerce, since that last word will benefit the organization in the present cycle and the future one.