9 Disciplines Of Business Financial Management You Should Master (Part 1)

9 Disciplines Of Business Financial Management You Should Master (Part 1)

A lack of financial management can cause profitability and cash flow problems and it’s a fact that this is a major cause of business failure.  

Too many companies fail to allocate sufficient time to planning and monitoring their performance and therefore miss out on being able to act quickly enough to stop crises occurring because they haven’t been able to spot the warning signs earlier.  

The best performing businesses maximize their success by being aware of these pitfalls. They manage their finances in great detail and use reliable information to make sound business decisions to ensure their longevity and success.  All this takes time plus the right skills and knowledge but taking sensible, practical steps will help any size of business to control their finances and avoid taking excessive financial risks.  

For smaller businesses, it’s so tempting not to bother, and instead use the order book and bank statements as a barometer for financial health but that’s neglecting all the other aspects businesses need to monitor.   You don’t need to have overly complicated systems in place and recent advances in digital accounting systems have made the automation of the bookkeeping processes so much simpler. From there, businesses really need a simple as a possible financial reporting system that takes the owner/managers through a logical and structured approach to documenting goals, setting targets in budgets and then monthly review time set aside to interpret what the reports are showing.

In this, the first of two articles (the 2nd one next month) I lay out some of the benefits made possible by having such a financial management system in place. So, make notes and ask us about anything that relates to you that you want to discuss further.  

1. Undertake sufficient financial planning and forecasting  

You should have a broad but clear financial framework that follows and ensures you achieve your long-term business growth plan.   Different plans work for different businesses and you should research what your industry parameters are to ensure you don’t fall behind the pack.   But circumstances change. When they do, your financial plan should change too.   Having such a plan will enable you to conduct some simple ‘what if’ forecasting of your different operating scenario’s so you can project the future impact of such changes.   To get started, at the beginning of each year take the strategies listed in your long-term business growth plan and include those allocated to this coming year to a 12-month operating budget to project your sales, costs and profit outlook. If you want help with this let us know as we have the latest software tools to help simplify this task greatly.  

2. Forecast your cash flow  

From the operating budget you then need to apply this to your cash inflow and outflows to produce a similar but cash-based forecast.   Again, good software will help you to chart the inflows (sales of goods or services) and outflows (accounts payable) of your business.   The software will let you change the time period and other variables, so you can really understand what's happening. If you look at these charts over a period of weeks and months, you'll get an idea of the rates of flow of money into and out of your business.   Obviously, you need the inflows to be greater than the outflows to make a profit. But the size of the difference is what's important. It will vary over time because few businesses make a consistent profit day in, day out.   Some months or weeks will be good, some not so good. Looking at the charts will help you see the pattern as these values change.   Review the charts to see if the difference between income and expenditure is often small? Does it sometimes dip into negative territory? Those are periods when your business is potentially at risk of cash flow problems. Try to find out what's causing this to happen at specific times.   You can then attempt to restructure some aspects of your business to avoid the dips.  

3. Make minor adjustments to regulate cash flow  

Where possible you should have enough cash on hand to last you approximately three to six months. That way, if you have a rough month or two it shouldn't have a major effect on your business. But if your cash flow is causing problems at specific times of the month or year, don't panic. You may be able to improve the situation without dramatic changes. For example:  

a) Consider negotiating different payment dates to your suppliers to better align inflows with outflows  

b) Experiment with reducing your invoicing payment terms by a day or two to encourage your customers to pay faster  

c) Understand the negative impact of having stock sitting in your back office or warehouse – it costs you space and revenue  

d) Establish a good line of business credit so you can access extra short-term money if necessary.  

e) Manage your company's debt  

Debt is a fact of life for many businesses. It might be start-up funding, loans for capital equipment or commercial mortgage payments. Few businesses are entirely debt-free. And if the cost of the money you borrow is lower than the return generated by your company's use of that money, it makes sense to borrow.   It also makes sense to keep an eye on your borrowing costs. This is particularly true with variable rate loans, which can change due to any number of reasons, some of which might only be in the small print of the loan contract.   Assess your debts on a regular basis. Look at repayment costs, see whether your circumstances have changed, and decide whether you need to reduce – or increase – your debt funding. And don't forget to shop around. Ask us for help if you don’t know the market as we do. Shifting your debts to a different lender can sometimes save you a lot of money.  

4. Review expenses regularly  

It's important to keep a close eye on your business expenditure. Good accounting software will let you quickly draw up useful reports. Make these a standard monthly reports pack that you sit down and take the time to review RELIGIOUSLY. If you need us to help interpret the numbers and give you the discipline to set aside the time, ask about our Virtual FD service.  

Especially keep an eye on your payroll costs too, even if you outsource some of it. For a growing company, this can suck up cash reserves quickly as you don’t tend to get credit terms on paying wages!   Remember to keep your personal and business finances separate: use a separate credit card and bank account for business-related expenses. That makes it much easier to keep track of your company's costs and identify business tax write-offs. And don’t use your business as a personal bank.   And the final word on private spending...make sure you set your pay to live comfortably but not excessively lavish to put the business finances under pressure. It can ruin your business, I’ve seen it too many times.

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