So how will financial management help me stay on track and why is this important?
Effective financial management goes beyond the record-keeping of an organization. Financial management requires the use of the financial reports produced at the end of a financial period to make informed decisions for the best interests of the company. Three key areas considered are planning, budgeting and measuring performance.
A business plan is a tool used to help get funding or for potential partners. Even if your business is not requiring funding or have a need for partners, a well thought out business plan can help an owner be more prepared for future stumbling blocks.
A good business plan will describe the company’s business activities, goals, stakeholders, marketing analysis, financial plan, risks and plan to overcome obstacles and achieve their goals.
A budget is a great way to keep your business on track. It is so easy to overspend, especially in the first few years in business. When creating a budget we need to be very honest with ourselves as to what we expect for future financing, revenues and expenses. A thorough business budget will provide you with the insights needed to grow your business efficiently and not run out of capital.
So you know your business goals, you have been sticking as closely as possible to your budget now is when we get to see how it all measures up. When measuring performance we use information found on the financial statements produced at the end of each reporting period. For many small to medium size businesses this is usually at the end of each year but depending on the amount of transactions and the needs of management or investors this may be each quarter or even monthly. Two key financial management tools for measuring performance are Variance Analysis and Financial Statement Analysis.
The variance analysis will compare the actual results against the budgeted amounts. The variance analysis can point out areas of concern, changes in the business environment or areas that were overlooked. The variance analysis can make for more reliable future budgets.
Financial Statement Analysis
Once the financial reports are run, we can then use the financial statements to calculate financial ratios. The ratios are used to benchmark the company’s performance against past year performance and that of competitors. Common types of ratios include:
- Profitability ratios
- Liquidity ratios
- Leverage ratios
- Inventory Turnover ratios
- Market Value Ratios
Successful financial management is important in order to keep your business on track. Financial management can help evaluate and adjust the business plan, measure performance, clearly communicate financial information, and create internal controls and accountability.