Key aspects of business finance and how to manage them
Milton Friedman, one of the great American economists and winner of the Nobel Prize in economics, stated as early as the 1970s that “The business of business is business.”
Whether you are running a wholly profit-driven business to enrich shareholders or a social enterprise for the benefit of stakeholders, the one thing that all businesses have in common is the fact that finance matters. Without showing profitability, there is no point for your business to exist. Even a social enterprise that has at its core a social good, will need profit to be generated from the business in order to meet these social needs on a sustainable long-term basis.
There are a number of components of business finance that this article will aim to debunk and simplify in order to create an understanding as to their importance to your business. The underlying premise is that financial management is key to the success of your business and if this is something that isn’t one of your core skills, then it is recommended to find the professionals who do have these skills and are able to provide both guidance and practical know-how in this regard.
The aim of good financial management must be to control, organize and direct, make financial decisions and implement a financial business plan, with the end result being a profitable business.
The outsourced finance model
Many choose to go the outsourced route and have a professional, or group of professionals deal with the business’ finances while you focus on the core aspect/function of the business. It is, however, advised that you keep an eye on your business credit reports and are always up-to-date on the management accounts and long-term financial planning. It may be a lot easier to have someone else deal with the finances, but it will pay to remember that as the business owner, final responsibility will be yours. So, even if you outsource, keep your fingers on the financial pulse.
The mobile or online app for in house financial management
The rise of accounting and financial management apps means that with a little understanding of the financial processes and systems, you’re able to do the practical financial management and reporting for the business. From FreshBooks to QuickBooks and more, there is now an app for most financial management processes. If this is the route you take, just make sure that the apps you choose are compatible and can be used together and in conjunction with the current financial reporting and accounting systems that your business already has.
Credit management
Debt and its repayment and management is a critical part of small business management. In fact, as the 2008 financial crisis showed, it is a key component of all businesses and one that must be effectively managed. Knowing what the debt-to-equity ratio is and how to manage this is essential if the business is to be sustainable and financially soluble.
Cash management
This is one of the critical elements of business survival. Any business that deals with cash from customers is at risk of some of the worst cash management habits that are common among small businesses today. Using cash received directly from the till is one of the unfortunate hallmarks of the small startup business. Poor cash management can make a mockery of any of the other financial management processes mentioned herein and must be regarded as the starting point of the entire process.
Understanding financial management and the aforementioned components is important for your business development and longevity.
