Effective financial management involves planning, organising and monitoring your financial resources. Good financial management will help your business to make effective use of resources, gain a competitive advantage and foster long-term financial stability. Therefore, financial management should be a key and ongoing process for every business. As a small business owner, an understanding of your company’s financial situation drastically improves your chance of long-term success. Committing to additional education, such as a graduate diploma of applied finance, ensures that you can gain control of your businesses financial management. The following article explores 6 other ways for small to medium enterprises to improve their financial management.
1. Understand the basics
Even if your business employs a professional to help you with your finances, it is still important to understand the basics of financial management. Financial reporting and bookkeeping is vital to maintain cash flow and meet profit targets. Therefore, all small businesses should understand how to read and make use of income statements, balance sheets, inventories and supply chains.
2. Monitor your financial position
Successful financial management is an ongoing process. On a daily basis it is important to understand at minimum; how many sales you have made, your stock levels, and how much money you have in the bank. Regularly monitoring the financial progress of your business is vital for you to be able to set targets, monitor expansion and review your business plans. It is impossible to be able to make effective goals for your business, without having a firm understanding of your current financial position. Having an awareness of the minimum that your business needs to survive, ensures that you never go below this amount and have enough cash to cover day-to-day costs including employee wages.
3. Understand your marketplace and competitors
Understanding your marketplace and competitors involves the need to conduct thorough market research. Financial management involves understanding your market, predicting returns and understanding how your company competes in relation to goods, services and pricing. Analysing your competitors strengths and weaknesses opens up new opportunities for your business to fulfill customer expectations and provide competitive pricing structures.
4. Keep up-to-date financial records
It is vital to document all financial transactions and business expenses incurred. Whilst this may seem difficult and time consuming, services such as automated bookkeeping have simplified this process. An automated system saves you time, reduces paper files and is more accurate than manual processes. Failing to keep your accounts in order means that you could lose money by failing to monitor when to pay suppliers or when customers have failed to pay on time. Using a good record keeping system will help you to track expenses and debts, and save time and accountancy costs.
5. Know your stock, supplier and customer basics
Successful financial management involves constantly monitoring your stock, supplier and customer figures. Your break even, gross profit and profit margin figures are essential to charge enough to cover costs and make a reasonable profit. No cost structure should be set in concrete, as changes in competitors pricing and other market factors will constantly alter your financial position. Therefore, a sound financial management plan will involve the constant review of these major figures in order to determine whether to increase or decrease product and service costs. Maintaining your cash flow and growing your profits also requires you to manage customer orders and supplier payments. To do this you must keep up with supplier payments and manage customer debt effectively and quickly.
By using mobile devices and tools like online banking, and secure cloud-based document storage, small business owners can work effectively from anywhere. Online accounting software should also be on the top of the purchase list for small to medium businesses. Accounting software keeps track of important financial and customer data including revenue, expenses and customer information.
By educating yourself on your finances, working with the correct tools and credible professionals, you maximise your chances of long-term success and can avoid common financial management pitfalls.