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Think about it. What's one of the first things you have to figure out when you decide to start your own business? Yes, it's financing.
"Stay on top of your finances. Don't leave that up to others." - Leif Garret
The value of the financial management of a business cannot be emphasized enough. It determines your profits, revenue, and so much more. But what is financial management about? And how can you excel in it? It can be very confusing when starting out. Therefore, I am about to reveal all you need to know about financial management, its components, and more.
The Basic Concept Of Financial Management Of Business
How to procure the funds and where to utilize them, all fall under the domain of financial management. The basic purpose is to ensure that the financial resources of the enterprise are put to the best use.
"Finance without strategy is just numbers, and strategy without finance is just dreaming." - E. Faber
The elements that often constitute financial management include the following.
- Decisions related to investments but in fixed and current assets.
- Arranging finances from different sources along with the policies and plans for the return
- Deciding how to distribute the net profit among the shareholders while also determining the amount of retained profits
Needless to say, the financial management of a business is its foundation, which significantly influences its future and that of everyone associated with it.
Of course, every financial manager must proceed with some goals and objectives in mind. Here are some examples.
- Ensure that the business never runs out of funds.
- Ensure shareholders get adequate returns.
- Funds must be utilized in the best way possible.
- Minimize the risk on investments and increase chances of maximum returns
- Plan a capital structure that works well for the company and strikes a balance between debt and equity capital.
The Functions Of Financial Management Of The Business You Must Know
It's not enough to simply understand what financial management is about. You also have to realize the role it plays in your business. Without first realizing it's importance and role it plays in your business, there's nothing that guides you towards taking serious action about it. So, what does it do for your business?
Estimating Capital Requirements
One of the first things that a finance manager has to deal with is determining how much capital the company requires. Every factor has to be considered, including the expected investments, profits, future plans, policies, and more. The purpose is to ensure that the estimations help increase the company's earning capacity to its full potential.
Development Of The Capital Structure
Now that it's clear how much money the organization needs, the next step is arranging the funds. You have to develop a capital structure that will benefit your company in the long term. You have to analyze debt-equity with utmost consideration to maximize the purposes.
At this point, you also have to be clear about the sources of funds that you can reach out to. These include issuing shares or taking loans. Another option is to use public deposits, or perhaps even crowdfunding.
Every funding source has its own set of pros and cons, and as an entrepreneur you have to weigh all the options and consider the various aspects before deciding on a suitable choice.
The financial management of the business won't be complete if the funds are not invested in appropriate ventures, or reinvested back into the business.
It's up to the finance manager to determine where the funds could be allocated. When starting out, it's wise to reinvest as much as possible back into your own business. This leads to rapid growth of your business.
The Handling Of Profits
It's great if your business has started to churn out profits. But this increases your responsibility too. The finance manager has to ensure that the net profits are handled in the best way possible.
He has to determine the benefits that can be offered to the employees to retain them. And also decide how to use the capital to take the business to the next level.
A great business is made by great people. As an entrepreneur you have to focus on those who form part of the business as well as the business itself. Hence, the finance manager has to ensure that the cash is managed effectively.
Workers have to be given their wages on time, bills have to be paid, and debts have to be cleared. And then there's the material that has to be purchased for the business too.
The Importance Of Financial Management Of Business
What happens when you ensure that the financial responsibility of your business is entrusted into the right hands? You'll quickly realize how the right finance manager can play a pivotal role in taking your business to the next level.
- For one thing, he will assist you in planning your finances in the best way possible.
- You can determine the best sources to acquire funds.
- It becomes easier to determine where the funds should be invested
- Organizational efficiency is increased ten-fold
- There are decreased chances of delays in the business due to a lack of funds
- Effective management of the finances can also cut down costs and ensure proper use of funds.
- There's a better chance of the company to take financial decisions that benefit it in the long term.
- You can plan how to maximize profits.
- It leads to a substantial increase in the shareholders' profits.
- You get a clear update about your financial state, enabling you to plan properly.
How To Ensure Great Financial Management Of Your Business
Beginners and even some experienced business owners are confused about how to improve their financial management and utilize the funds appropriately. Here are some tips that can help you improve your financial management skills.
Focus On Your Budget
The first step of financial management is developing the annual budget. This gives you a plan for managing the finances all year round. It provides you with the guidance you need to make decisions at a later stage.
You can figure out the goals you want your company to achieve this year. Perhaps you intend to expand into a new area, or maybe you want to open a new branch. You can decide on your annual budget with the goals in mind.
While working on the annual budget, you will also get a better understanding of your income and where the capital is being utilized. Hence, it will become easier for you to decide if your expenditures need a bit of work.
Quality financial management is the key to success when it comes to scaling up your business.
Use Software For Financial Management
Going through heaps of paper and balance sheets not only takes up a lot of your time but also makes financial management a lot more complicated. Luckily, you can simplify things by using the appropriate software for this purpose. There are many business tools that can come to your assistance.
The most significant benefit of using digital platforms and software for this purpose is that you wouldn't have to worry about backing up the data. You can streamline the whole process and keep accurate records of all your finances.
Even a tool as simple as Excel can really help when it comes to financial management once set up correctly.
It's Time For Automation
Have you ever wondered why it's so common for business owners to have so many pending bills? It's because no one can remember all the due payments. On top of it, who has the time to make all the payments manually?
Fortunately, technological advancements have dealt with this issue very effectively. You can automate your payments and get rid of this stress for good. Online banking provides you with the option to automate all your expenses. Hence, you will never have to worry about paying penalties for late payments again.
Select Your Investors With Careful Consideration
Financial management is all about doing what's good for your business. And for this, you need to arrange funds, and oftentimes this comes with the help of investors.
The right investors can lead to your business growing by leaps and bounds. Furthermore, these investors make it easier to overcome obstacles that often come in the path of every business. Therefore, make sure that you select appropriate investors for your business.
Focus On Your Credit Score
Every business needs loans at some point. And your credit score comes in handy when it comes time to take a loan. Make sure that your credit score does not become a roadblock for your funding. Indeed, even prospective customers sometimes take your credit score into account to gauge your credibility.
Ensure that your financial management strategy is developed such that a good credit score is easy to maintain.
Take Measures For Protecting Your Business
The risk of fraud in the business world can never be eliminated completely. Therefore, you must set aside some part of your budget for your company's protection too.
Invest in cyber security and keep your anti-virus software update. Remember, you also have to protect your clients' data.
Let Your Financial Management Take Your Business To Great Heights!
No business can run for long without effective financial management. If things get tough, you can always seek the help of a professional.
Not every business owner has a sound understanding of managing finances, and this is where an accounting professional can come to your assistance.
Keep one thing in mind. Sometimes, entrusting the responsibility to someone else can make things much less complicated for you.
Catch you on the flip,
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