There’s no quick formula to mastering financial management. However, knowing the basics can be the difference in whether your business succeeds or not.
Why is finance important?
Financial management is important because it helps your business stay on track.
It ensures that your business can meet its obligations, make informed decisions, and achieve its goals. As a result, it maintains financial stability, minimises risks, and supports your business's growth.
Without a firm grasp of how to manage business finances, your company might have trouble staying afloat.
What is meant by financial management?
Financial management is all about handling a business’ money to succeed. This means:
- Keeping a record of all the money coming in (like sales) and going out (like bills and salaries). This helps the business see how well it’s performing financially.
- Managing cash flow to make sure there’s enough to cover everyday expenses. This includes planning for any future money needs.
- Deciding how to save extra money and where to invest it to get the best returns. This might include buying assets like new equipment or property.
- Looking at financial reports like balance sheets to understand the business’ financial status and making informed decisions.
Understanding business financial management helps you manage resources effectively.
What are the 4 types of financial management?
The four main types of financial management are:
Working capital management
This is about handling day-to-day money needs, like paying employees and buying materials. It ensures there is enough cash, inventory, or other quick assets to keep the business running smoothly.
Revenue cycle management
This deals with how a company earns money from selling its products or services over time. For businesses that sell services or subscriptions, revenue is spread out and counted each month or quarter, not all at once.
Capital budgeting
This helps a business decide how to spend its money on new projects or investments. It checks if these investments will make the company more profitable and achieve its goals.
Capital structure
This is the mix of debt (loans) and equity (ownership) used to finance the company’s activities and growth. It is often shown as a debt-to-equity ratio, which tells how much debt the company has compared to its own funds.
What is the main goal of financial management?
The main goal of financial management is to keep a business growing and in good financial health. Here’s how it helps to achieve this:
- Keeping the business running smoothly by ensuring your business has enough funds to pay bills and stay open. This helps avoid running out of money or going bankrupt.
- Increasing profits by setting the right prices for products or services, stopping unprofitable offerings, and finding profitable new opportunities.
- Keeping an eye on how money is spent can help you find ways to cut unnecessary costs. This helps keep overheads low and makes sure the company uses its money wisely.
- Ensuring a good return on investment for those who put money into the company.
- Attracting more investors because the business is showing a good return, thereby helping the company grow and expand.
- Cash forecasting ensures the company has enough cash to cover daily operations and invest in new projects. Proper cash planning helps the company grow and handle any unexpected expenses.
- Reducing risks by ensuring you comply with laws and regulations to avoid fines or legal problems. It also includes planning for environmental and social responsibilities.
How to manage business finance
To manage your business finances well, you need to know the basics, with a focus on:
- Budgeting
- Forecasting
- Monitoring financial performance
This includes understanding financial statements, bookkeeping, and balance sheets. These tools help you keep track of money coming in and going out. If you learn how to manage small business finances, you'll be better at budgeting and planning for the future.
Research is the key. The Internet, as ever, is a fantastic resource with all sorts of information and downloads on money management available. These cover the basics such as statements and how to read them, bookkeeping and balance sheets, along with the essential, core terminology and what it means.
There are also numerous courses offering training in financial management, which can be completed either online, at home or at a teaching venue. Online course providers like Coursera and Udemy can help you learn these skills.
10 tips for managing small business finances
Here are some simple tips to help you manage your small business finances better:
1. Pay yourself
Don’t forget to pay yourself a fair wage. Even if you’re focused on growing your business, you need to make sure your personal finances are in good shape too. You’re part of the business and deserve to be paid just like everyone else.
2. Invest in growth
Set aside money for future improvements and opportunities. Investing in your business can help it grow and attract better employees. This helps keep your customers happy and boosts your business’s value.
3. Don’t be afraid of loans
Loans can help you buy equipment or expand your team. They also improve cash flow, so you can pay your bills and employees on time. Choose loans with terms and rates that are easy to manage.
4. Keep good business credit
Good credit helps when you need loans or buy property. Pay off your debt quickly and avoid high-interest loans. Only get what you can easily repay.
5. Have a good billing strategy
If some customers are late paying their bills, try changing your payment terms. For example, offer a discount if they pay early. This can help you get paid faster and avoid cash flow problems.
6. Spread out tax payments
If saving for taxes proves to be challenging, try paying monthly instead of quarterly. This makes it easier to manage and budget for your tax expenses. Use online tools and accounting software to help with your tax payments.
7. Keep an eye on your books
Regularly check your financial records, even if you have a bookkeeper. This helps you spot any problems or mistakes and keeps your business finances in check.
8. Focus on expenses and ROI
Keep track of where you spend your money and what you get back from it. If something isn’t paying off, cut back and spend more on what works. This helps you make smarter investments.
9. Build good financial habits
Create routines for managing your finances. This can help prevent fraud and keep your business financially healthy. Regularly review and update your financial information.
10. Plan ahead
Always think about the future of your business. Planning for the next five to ten years helps you stay competitive and prepared for changes.
By following these tips for good financial management, you can keep your small business finances organised and healthy.
Your common questions answered
The main job of financial management is to ensure that a business's financial resources are used efficiently and effectively. It helps by:
- Keeping the company stable. By managing money well, the company prevents itself from going into debt or running out of money.
- Supporting growth. It helps the company plan for growth, like expanding or improving products, by making sure there’s enough money to invest.
- Improving efficiency. It makes sure the company spends money wisely and finds ways to save.
- Providing insight. It gives a clear picture of the company’s financial status, helping in making better business decisions for the future.
A Financial Manager is in charge of handling a company’s money. Here’s how:
The Financial Manager figures out how much money the company needs to operate and grow. This depends on the company’s financial planning for spending and earning money. They make sure the company can earn more in the future.
After deciding how much money is needed, the manager plans how to get it. This includes deciding how much to borrow (debt) and how much to get from owners or investors (equity).
The manager decides where to invest the company’s money to make more money. They choose safe and profitable opportunities to grow the company’s funds.
When the company makes a profit, the manager decides how to use it. This includes saving some money for future needs, investing in new projects, and giving some money to shareholders.
The manager makes sure there is enough money to cover daily expenses like salaries, bills, and buying supplies. They ensure the company’s finances are well-organised.
The manager also checks the company’s finances regularly. They use tools to forecast future money needs, analyse financial data, manage risks, and control profits and costs.
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