The success of any business venture depends on the efficient and accurate management of its finances. A process that would involve everything from planning to managing financial resources with the aim to help the business achieve its milestones and grow.
Here, we have explored the key reasons why the financial management process is important for your business. To assist business owners to step up in their management of finances, we have also suggested 6 financial strategies for business growth.
Importance of Financial Management
According to Guthman and Dougal, financial management is a process of planning, raising, controlling and administration of funds used in the business.
It is a vital activity for any business establishment to ensure efficient operations. It helps to:
- Keep track of cash flow: Poor cash flow management has been identified as a major reason for the failure of a business venture. To avoid such a fate, financial management becomes important as it involves the analysis, planning and monitoring of cash flow. Cash flow management ensures that your business generates sufficient funds to meet the required expenses for efficient functioning.
- Protect business against unpredictable events: No matter how sophisticated technology or forecasting tools youuse, it is a fact that the future will always remain unpredictable. But through planning and management, you can mitigate the risks associated with these events. Using financial management techniques, you not only can keep your finances in order but also protect your business from future uncertainties. For example, through ensuring adequate liquidity and access to cheap sources of finance, helps to meet the challenges in the business environment.
- Maximise profit: Without profit or less profit, the growth of business suffers and sometimes leads to stagnation. The scope of financial management includes assessing working capital needs, planning profits, and estimating returns on investment. All these activities lead to maximisation of enterprise profit as well as shareholder's wealth.
Financial Management Tips for Business Growth
As a business owner, you should follow the following tips to manage your finances for business growth.
- Adopt the latest financial software: Financial software nowadays plays an important role in the monitoring of business performance. Therefore, it is necessary to adopt the latest financial software packages that are designed for particular industries, like manufacturing, construction, medical etc. Financial software helps in continuous financial monitoring, cash flow management, inventory tracking, invoicing and generating actionable reports. Using these software helps in keeping track of finances automatically, minimisingmistakes and saving time.
- Keep a positive cash flow: One of the key elements of financial management is cash flow management and the goal should always be to keep it positive. This indicates the financial soundness of your business and an increase in the company's liquid asset. Having positive cash flow enables you to pay debts, reinvest in the business, maximiseshareholder’s return and gain easy access to different types of business loans.
- Do not mix personal and business finances: Mixing your personal and business finance could cripple both and make it look very complex. In short, it is a recipe for a complete business disaster. Some of the disadvantages of mixing personal and business finance are:
- Not able to build business's credit profile
- Complex financial statements
- Personal liability problems
- High risk of a debt trap - Be prepared for emergencies: It is not necessary that your business operations will always function smoothly. There will always be challenges coming up, which you need to counter effectively. Establishing an emergency fund will help you to counter the challenges and also enables you to take calculated risks.
- Stay up-to-date on invoicing: One of the important factors in achieving positive cash flow is getting invoices cleared out in time. Therefore, always communicate the payment terms clearly to the buyers, as it will help you to get paid with little effort.
- Keep a tab on business expenses: Keep your business expenses always under the check and make sure, you have enough cash-in-hand to make necessary payments. Identify the leakages in money outflow and take steps to eliminate those without affecting your business operations.
Conclusion
Managing finances is the biggest challenge for any business enterprise, whether small or big. That is why, it is critical to manage your business finances with a customised financial management plan.
With financial management, you can review everything minutely, plan accordingly and manage your business finances effectively. Keep in mind the above financial management tips to be prepared for unpredictable events and make the most from your investments.
