Success comes from effective planning. Learn why financial management is important for small business success.
“By failing to prepare, you are preparing to fail.” – Benjamin Franklin
Failing to manage your finances responsibly is akin to failing to prepare. Surprisingly, we still work with many small businesses that do not have a financial management system in place to drive their company. In this post, you will learn why financial management is important for small business success and how to get started.
In previous blog posts, we have written about how to manage your balance sheet for success, 10 steps to better manage your cash flow, and how to plan for disruptions to your cash flow. In this post, we discuss why a small business needs to have a financial management system in place to drive its small business.
Why is financial management important for small business success?
Many factors drive success as a small business. One of the most important of these is financial management. The good news is that with financial management, you can work around these factors and ensure your small business stays successful.
While having a well-organized bookkeeping system is essential to keeping on top of your business operations. Even more important is having established processes governing how you use your money, ranging from how money comes in, in the form of revenue, and how it goes out in the form of costs and expenses. Financial management is the term used to define these processes.
What is financial management?
Financial management comprises a series of business processes designed to make educated and informed financial and operating decisions. Over time, these processes will develop to be more efficient, effective, and specific to your business.
In addition to focusing on financial management optimization, pay attention to emerging best practices. Financial management best practices come from various sources, including academic research, best-practice observations from other successful small businesses, and in-depth case studies.
Why is financial management critical?
Financial management enables you to make small accomplishments towards daily financial objectives. A sound financial management system will enable you to:
- Access capital as you will have the tools needed to plan ahead
- Be proactive rather than reactive when running your business
- Share budget information with your business lender to simplify the borrowing process
- Update investors about financial planning information
- Run a profitable and efficient business operation, and
- Make better informed financial decisions.
What are the outcomes of effective financial management?
From a financial perspective, effective financial management will provide you with the strategies and tools to:
- Determine your short-term working capital needs that support your accounts receivable collections and inventory
- Avoid unnecessary investments in fixed assets
- Set growth-oriented sales goals to help your business become a proactive rather than reactive sales organization
- Define an effective pricing strategy for your products and services, improving your gross profit margins.
- Operate more efficiently through the control of your administrative expenses
- Potentially reduce those factors that go into your cost of goods sold, such as your direct labor costs, inventory costs, and supplier costs.
- Perform better tax planning, and
- Create a process to understand how the independent variables driving your business will impact a decision.
Create a system to observe trends
The first reason to implement a financial management system is to create a way to observe trends in your budgets and accounts. By putting yourself in a position to anticipate events concerning your budgets and accounts, you take the first step towards becoming a proactive business rather than a reactive business. Being proactive gives you more control over the long-term viability of your business.
Financial management starts with your financial statements, specifically your balance sheet, income statement, and cash flow statement. When implementing a financial management system, you should consider preparing your financial statements monthly. Doing so will help you identify trends in budget and accounts before they become problems.
Manage your capital expenditures
A second reason to develop a financial management system is to help manage your capital expenditures. Most businesses use assets to generate income. Financial considerations related to capital expenditures should balance the asset’s purchase price with the income that it produces. A capital expenditure plan or strategy will help you avoid overextending your business by borrowing too much for asset purchases.
Better manage your cash flow
Another reason to develop a financial management system is to manage your cash flow better. In addition to capital expenditures, you will have expenses associated with running your business. This includes such expenses as payroll, office supplies, utilities, and insurance.
Financial management of your operating expenses consists of looking ahead at how much is due, by when, and ensuring that you have the cash on hand to pay your bills. With this information, you can manage your cash flow by adjusting the terms of when your clients pay you to ensure that you have the money on hand to pay your bills.
Decrease your cost of goods sold
A final reason to develop a financial management system is to decrease your cost of goods sold. Most businesses operate with budgets. Occasionally, budgets will differ from actual expenses. As a result, the cost of goods sold can vary over time. By being proactive, you put yourself in a position to respond to fluctuating prices by either renegotiating with your suppliers or finding new suppliers altogether.
Wrapping up why financial management is important for small business success
As we have seen, effective financial management is more than just creating your financial statements every month. It is about using the information within your financial statements to improve your business.
Being proactive with your business means getting out in front of “trends” before they become problems. Doing so gives you more control of your business and likely increases the long-term viability of your business. Sound financial management ensures that what your business accomplishes daily is not lost on wasteful spending.
If you are looking for a merchant cash advance, working capital loan, or SBA loan, we can help as we specialize in helping small businesses reach their financial goals. Contact us or call (800) 795-3919 to speak to a small business specialist today.