In this article, we will discuss the importance of financial management in business and how it impacts your overall success or failure rates.
Financial management is recommended even for individuals, but it’s mandatory for a business to keep running without hurdles. While there are no set rules on how to achieve this, any financial management plan generally consists of a few key metrics.
We will discuss what these metrics are and how they may impact your business.
Table of Contents
What is financial management in business?
Financial management for businesses simply means managing everything about the finances in a way that contributes to the growth of the company and keeps the company solvent. It involves many steps which when combined ensure that the company either grows or at least reduces its chances of bankruptcy.
While often misinterpreted as “saving money or building up of assets”, that’s not what financial management is. In fact, those are merely byproducts of a good financial management plan and not the direct goals.
Let’s discuss some of the most prominent steps of a good corporate financial management plan.
Recording and monitoring the finances (Bookkeeping)
For any kind of management to be executed, there needs to be monitoring. You need to have the data at hand to manage it properly. Hence, the first and probably most important function of any financial management plan for businesses is proper records and monitoring.
All financial aspects of a business, including cashflow, debts, investments, revenue, losses, and everything else needs to be recorded. You can either do this manually, or use an easy to use but advanced financial planning and analysis software.
The benefit of using software is that you get data presented to you in charts, graphs and most calculations are executed automatically as per the set parameters. Moreover, these tools generate reports that are generally error-free and easier to understand than those done manually.
Cash flow/supply of funds management:
The primary aspect for any company to function at its best is the availability of cash. Hence, cash flow management and ensuring that enough funds are available for the company at any given time is critical. In fact, 82% of businesses fail due to cash flow problems!
Cash flow management, put simply, is the process of acquiring new funds or ensuring that the current funds keep coming in. In case the current fund supply gets interrupted, a good financial management plan ensures there’s a backup or a new source ready to take over.
Proper fund utilisation
One of the goals of any financial management plan is always to gain the maximum possible returns for the money. Hence, a good financial management plan ensures that the available funds are used in a way that they bring in some form of currency for the company. It can either be direct revenue, more exposure, market-share, better reach, or anything like that.
If the money used brings in some form of positive outcome for the company, it’s considered a good utilisation of the funds. This generally includes looking at the overall cost of operation, eliminating investments where possible, and investing where you see a better return.
Ola, The Indian alternative to Uber recently switched from Google Maps, to an in-house mapping system called Ola Maps. This move saves them nearly $10 million a year. This is exactly what proper utilisation of funds looks like.
Proper fund utilisation also helps avoid cash flow problems. Technically, all the factors impact each other and messing one up can impact the entire plan.
Prediction and forecasting
Corporate financial planning isn’t just about working with the present, but also the future. You need to study the market and be able to predict future market conditions. It’s possible that the cost of raw materials goes up or down, interest rates change, a fraction of your invoices don’t get cleared, or some of your customers leave.
Financial planning encompasses the ability to read historical patterns, current market/consumer behaviour, and use your finances accordingly for the future. This impacts nearly all major financial decisions, and you can decide if you should be hiring, firing, or seeking investments.
Taxes and legal compliances
Companies generally have a higher number of transactions than an individual. Hence, they also have a more complex taxation form to fill. This can be done using various strategies. Similarly, your financial management plan must also take care of legal compliances. This is simply because failing to do so may throw a wrench in your entire plan in terms of legal bills, wasted time and resources, or negative publicity.
Returns and investment management
Financial management of a company also involves allocating proper returns on investments to the current shareholders, as well as making new investments. Your current shareholders need to be compensated without error and as per your contracts. The trick is being able to compensate your shareholders even when the company may not be in the green to ensure they do not leave or put in new investments. When compensation is not possible, a good financial management plan will ensure your shareholders are satisfied with a proper plan that should get them future returns.
Importance of financial management
So far, we’ve covered what financial management generally consists of. But what would happen if you simply don’t care? Or your financial management plan isn’t as serious or strong as it should be?
Well,
- Better understanding of the company’s current financial standing: When you record and monitor your transactions, debts, operating cost etc. you have a clear idea of where you stand.
- Mitigation of present and future issues: A financial management plan allows you to manage your current situation better by diverting and managing funds. It also helps you see into the future and predict issues that may arise, helping you nip them at the bud.
- Avoid legal hassle: The financial management plan also takes care of your taxes and other legal compliances. This ensures you aren’t sued by your investors or the system itself for non-compliance.
- Overall profitability: Everything in your financial plan ultimately contributes to your company’s increased profitability in the long run.
- Higher investor/shareholder trust: A financial plan helps your investors understand your company’s financials better. This boosts their trust & confidence even in cases when the company may not be performing all too well. “A visible stronger enemy is better than an invisible weaker enemy” and hence they understand what’s the problem and what you’re doing to solve it.
Conclusion
The basics of corporate financial management as well as its benefits should be pretty clear by now. Do note that there’s no concrete rule book when it comes to this. The exact financial management plan will depend on the company, your financial goals, current standing, investor sentiment and basically everything else.
However, while the plan may differ, the end goal and benefits reaped from any financial management plan are nearly identical for any company. Also, despite the different plans, the right software will help you achieve your goals regardless of how different they are from some other company.
Bottom line, get your business a financial plan.
