If you’re going to run a successful business, then you’ll need to have a firm grasp of your finances. Effective financial management encompasses a lot of smaller sub-disciplines, each of which is designed to help a business marshall its financial resources. Put simply, it will help you determine what you’re going to be using your money for and devise processes that will help you gather information on your financial affairs.
Benefits of Effective Financial Management
Let’s take a closer look at each of the core components of an effective financial management system.
Improved Cash Flow
The right system will help you to maintain enough liquidity. Without the necessary cash reserves, you won’t be able to pay your staff or your suppliers. Through techniques like budgeting and forecasting, you’ll be able to allocate spending while still maintaining a buffer that will allow you to deal with any unforeseen costs.
A lack of cash flow can lead to unnecessary labour and stress. So, you can think of financial management as a means of proactively avoiding this. The right payroll software will help you to automate your spending on wages, and to provide you with detailed, current, and actionable data to inform your wider financial plan, supported by a Core RMS platform.
Profit Maximisation
Driving up profitability is a matter of assessing costs and looking for ways to bring up revenue. It might be that there are systemic patterns of overspending, baked into the way that you currently do things. The right financial management will help you to identify these patterns and cut costs, which will ultimately drive up your bottom line.
Risk Management
Let’s consider a nautical analogy. The Titanic was an incredibly tough and well-built ship, but even it failed to survive collision with an iceberg it didn’t see coming. By contrast, modern vessels tend to be much more fragile – but they’re able to see threats well in advance, and avoid them.
That’s how effective financial management works, too. You’ll be able to see where you’re at risk, and take action to protect yourself. Market shocks, recessions, and sudden unexpected changes in the Bank of England’s base rate can all pose different kinds of threat.
Strategic Planning
The right forecasts will allow you to form an idea of what’s going to happen in the future, and how your finances will be affected. You can assess various contingencies, and look at how they’ll affect your business.
Key Financial Management Practices
So, which practices will help you to accrue these benefits? We’ve already considered some of them.
Budgeting and Forecasting
This is the process through which you’ll predict how much money you could make over a future period, and then decide your spending accordingly. The more accurate the forecasts, the more meticulously you can allocate the money.
Regular Financial Analysis
An effective financial management system will not only gather data but also attempt to make sense of it through analysis. You should have an idea of what your Key Performance Indicators are.
Expense Management
A business should be able to identify its costs and reduce them. This is where budgeting is particularly important – but it’s really only the start of a more involved process of deciding where cuts can be made.
Investment and Financing Decisions
Your business might not only make money by selling goods and services; it might also make investments. Your financial management should include some investigation into which investments are wise and which are unwise. Implementing the use of a Core RMS platform can help you track the performance of your investments and make informed decisions.
