If you are starting a business, one of the first questions that you may have is: what is financial management, and why is it so important? Financial management is crucial for any business, as it helps to manage the inflow and outflow of funds, cash flow, and investments. It also helps business owners stay in control of the business’s finances. Therefore, managing finances is essential to business owners and can help you grow your business.
Managing the inflow and out of finances
Managing the inflow and outflow of money is crucial to running a profitable business. Businesses generate huge sums of money that must be spent on paying bills, delegating funds, and making multiple engagements. Without proper cash flow management, a company can go bankrupt. However, there are ways to improve cash flow without cutting expenditures drastically.
According to Kirk Chewning, Cane Bay Partners, located in St. Croix, managing the inflow and outflow of cash is vital for any business. Unfortunately, 60% of companies fail due to a lack of cash flow despite their profitability. These businesses could not make payments for salaries, buying materials, and paying suppliers. This left them in a bind, and they needed external help to survive the financial crisis. This problem can be avoided with careful cash flow management.
Managing the expenses
Revenue and expenses determine the profitability of a business. Both of these variables should be managed and kept under control to ensure a company’s success. Proper management of these variables is key to business success, but there are other variables to keep in mind. If not appropriately managed, expenses can become a huge source of problems and even lead to the failure of a company. Identifying and reducing them whenever possible is important to work expenses properly. Remember, every dollar saved on costs means an extra dollar of profit!
Managing the cash flow
Cash flow management is an essential aspect of running any business. If adequately managed, cash will flow to meet payroll obligations, expand operations, and pay bills on time. Healthy cash flow management requires regular analysis of business finances to project future cash needs. Other aspects of cash management include managing accounts receivables, following up on client payments, and managing accounts payable.
For a small business, the most important aspect of cash flow management is forecasting what-if scenarios. For a company with a small client list, cash flow planning can help identify the areas of greatest risk and forecast what-if scenarios. Without proper planning, a company may not survive in the long run. For this reason, a cash flow budget is essential for a small business owner.
Reducing wastage
The key to reducing wastage is understanding the true cost of a waste item, which includes the cost of raw materials and the hidden costs of production, disposal, and energy. Considering the total cost of waste, reducing wastage is more profitable than recycling and can save your company money while maintaining or improving its competitiveness. Aside from reducing waste, the financial benefits of lowering wastage can be enormous.
