“Good financial management is the cornerstone of every successful business.” – Richard Branson
Imagine piloting a plane with your eyes closed, hurtling through the skies with no idea of where you are or whether you’ll reach you destination. Sounds terrifying, right? Yet, many business owners are doing just that when it comes to managing their finances. Without a clear, real-time view of their financial landscape, many are steering their businesses blindly.
The truth is, financial management isn’t just about crunching numbers or meeting compliance requirements. It’s about giving your business the best chance at success by ensuring its financial health is monitored, managed, and prepared for the future.
For many SME CEOs, financial management can seem daunting, but it doesn’t have to be. By adopting a few simple principles and using the right tools, you can take control of your business’s financial health and steer it towards sustainable, long-term growth.
Why Financial Management Is Non-Negotiable
Sound financial management is the cornerstone of every successful business – the backbone that supports all your ambitions. Entrepreneurs often focus on products, services, or growth, but financial management is what makes it all possible.
The Dashboard Analogy
You wouldn’t drive your car blindfolded, so why manage your business finances that way? Having a real-time or near real-time view of key financial metrics like revenue, costs, gross profit, net profit, and cash flow is critical. A financial dashboard, much like the dashboard in your car, allows you to identify trends, spot potential shortfalls, and make necessary adjustments.
Software tools like Xero, QuickBooks, and others can help you maintain a live overview, providing instant access to your business’s financial health. With the right setup, you can get alerts for any red flags – whether it’s cash flow shortages, overdue invoices, or a sudden dip in profits.
But it’s not enough just to have the tools; you need to know how to interpret what they’re telling you and use that information to make informed decisions.
Working Capital Explained
Working capital is the difference between your current assets and current liabilities. In simple terms, it’s the cash available to fund your day-to-day operations – the lifeblood of your business. Monitoring working capital is crucial because it directly affects your business’s liquidity – its ability to trade.
Let’s take a closer look:
- Debtors Days: Track the age of debts owed to your business. The longer they go unpaid, the more it disrupts your cash flow. Develop a clear strategy for collecting payments promptly.
- Creditors Days: Ensure you’re paying your suppliers on time. It helps build trust and can sometimes give you leverage in negotiations.
- Inventory Days: The quicker you turn over inventory, the healthier your cash flow. Set parameters and ensure processes to flush out old stock and avoid overstocking.
Understanding your cash-to-cash cycle – the time taken between outlaying cash and receiving it back – is essential. By keeping an eye on these components, you can optimise your working capital and maintain healthy cash flow. As Peter Drucker famously said, “Profit is secondary. Cash flow matters most.”
If you’re curious about how to better manage your cash flow, see my article, “Mastering Cash Flow: The Lifeblood of Your Business.”
The Importance of Financial Forecasting and Budgeting
Forecasting and budgeting are essential tools for predicting your future financial performance and making informed decisions. Budgets set a financial roadmap for the year(s) ahead, while forecasts help you adjust that plan based on real-time data.
Why are these tools so crucial?
- Anticipating Financial Needs: Forecasting helps you anticipate upcoming cash requirements or potential shortfalls.
- Strategic Decision-Making: Budgets provide a benchmark to measure performance against, helping you decide whether to invest in growth, reduce costs, or hold steady.
- Managing Risks: Both tools enable you to scenario-plan for different economic conditions, ensuring you’re better prepared for unexpected market shifts.
By combining these tools with your real-time dashboard, you can create a full picture of the financial health of your business.
Separating Business and Personal Finances
One fundamental rule in business finance is keeping your business and personal finances separate. Mixing them up not only creates a legal mess but can obscure the true financial picture of your business. Company assets are not directors’ or shareholders’ assets, and confusing the two could expose you to legal risks.
Your fiduciary duty as a business owner or director means you must manage your company’s finances transparently. This is not just a best practice; it’s a legal responsibility in most jurisdictions. The consequences of neglecting this can be severe, so it’s essential to maintain clear boundaries between personal and business finances.
Creating Your Financial Command Centre – The Role of a Board
Advisory and Statutory Boards – What’s the Difference?
A solid financial management system includes a well-structured board. Whether statutory (required by law) or advisory, boards provide strategic guidance, oversight, and risk management. For SMEs, boards don’t need to be large or overly formal, but regular board meetings bring enormous value when run properly.
Statutory boards are mandated by law (in South Africa and the UK, for example, along with many other countries), while advisory boards offer strategic insights and guidance without the legal obligations. A good board comprises a mix of internal (executive) and external (independent, or non-executive) directors, creating a balanced, objective view. This combination of perspectives allows you to look at both the short-term operational and long-term strategic aspects of your business.
Regular board meetings provide a forum for reviewing progress, adjusting strategies, and identifying potential risks. As I’ve discussed in my article “Boards Accelerate Success & Increase Value for Small Companies, Too,” even the smallest businesses can benefit from structured board oversight.
Fiduciary Duty and Strategic Oversight
A well-functioning board plays a vital role in ensuring the financial health of the business. Directors have a fiduciary responsibility to act in the best interest of the company, which includes safeguarding its assets, ensuring accurate financial reporting, and addressing potential risks early. Without a vigilant board, businesses risk falling into financial mismanagement, which can have serious legal and operational consequences. For more insights into these responsibilities, see “The Role & Responsibilities of the Company Board.”
Practical Tools for Financial Control
The Business Dashboard Explained
Like a car’s dashboard, a financial dashboard provides a real-time view of your business’s key performance indicators (KPIs). Tracking metrics such as gross profit margin (GP%), net profit margin (NP%), debtor days, inventory levels, SG&A costs, and working capital helps you stay on top of your business’s financial health. These KPIs should be set up with thresholds that trigger alerts if something goes wrong, and I also recommend setting up further alerts that warn if individual transactions appear outside the norm. It’s much like the warning lights on your car’s dashboard – they only show when something needs your attention.
Remember, dashboards need to evolve as your business grows, and regular reviews ensure that you’re monitoring the right metrics at the right time.
Reviewing Financial Health at Regular Intervals
Financial health isn’t something you check once a year. Monthly, or even quarterly, reviews – generally as an item on your board meeting agenda – ensure you’re on top of the latest trends and can pivot when necessary. Difficult times, such as economic downturns, may require the more frequent reviews. During these reviews, examine your KPIs, assess your cash flow, and identify any trends that require action.
If you need guidance on what these entail, check out my article on “The Quarterly Review: Course Correction or Carry On?”
Continuous Learning and Adaptation
The financial landscape is ever-changing, making it essential to stay informed about trends and regulations. Investing in financial literacy, both for yourself and your team, can significantly enhance decision-making capabilities. Utilising technology for financial management, such as advanced accounting software and analytics tools, can streamline processes and improve accuracy.
Managing Financial Relationships (Banks, Suppliers, and Stakeholders)
Open Communication Is Key
Building and maintaining relationships with banks and suppliers requires regular, transparent communication. Keep them updated on your financial performance – especially if circumstances change – and you’ll find it much easier to secure favourable terms, negotiate better credit lines, and maintain that all-important trust.
Debt and Credit Management
Managing debt effectively is an art and a tool for growth, but if left unchecked, it can quickly spiral into the downfall of a business. Make sure you have clear payment terms with suppliers and customers alike. It’s about striking a balance. While shorter payment terms with debtors can help with cash flow, longer ones might be beneficial in specific scenarios. Similarly, shorter payment terms with creditors can often lead to better pricing, while longer ones can help with cash flow when necessary.
Preparing for Financial Shocks
Scenario Planning and Contingency Funds
No one can predict the future, but businesses can, and should, prepare for it. Scenario planning helps you anticipate different financial outcomes – both positive and negative. Maintaining a contingency fund is also crucial for weathering unexpected downturns, whether it’s a sudden loss of a key client or a wider economic shift. Building cash reserves not only stabilises your business but also positions you for future growth opportunities, while strong relationships with banks and other suppliers can provide a lifeline in difficult periods.
As I’ve noted in “How Resilient is Your Business? Preparing for Risk,” financial resilience is key to long-term success.
Fiduciary Responsibilities and Legal Obligations
Protecting the Business and Directors’ Assets
Directors are legally required to act in the company’s best interests at all times, and this extends to ensuring that company assets are protected. Mismanagement of finances can lead to directors being personally liable, so understanding and meeting your fiduciary duties is non-negotiable. For more details, see “Directors – Are You Risking Your Assets?”
The Importance of Accurate Record Keeping and Financial Reports
Accurate financial reports are not just a legal requirement; they are a key part of strategic decision-making. These include, financial statements (balance sheet, income statement, cash flow statement), management accounts, and tax returns
Clean, transparent records provide insight for both internal management and external stakeholders, ensuring accountability at every level, and helping protect the business from legal and financial risks, while maintaining trust with stakeholders.
Conclusion:
Financial management isn’t just about understanding numbers; it’s about building the systems, tools, and governance structures that keep your business on track. With the right approach, financial management becomes a powerful engine for growth, allowing you to navigate challenges and seize opportunities.
Is your business financially prepared for the future? Take the time today to evaluate your financial management approach.
It’s your turn now: What financial tools have you found most helpful in keeping your business on track? Let’s discuss how proper financial management drives success – or where you might need to improve!
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This month we’re focussing on Finance Made Simple for Business Growth, with this being the first article in this series.
Stay tuned for further articles in this series over the weeks ahead or, better still, subscribe to my blog and receive the latest articles automatically, simply by clicking here.
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With over 50 years of experience in the technology industry, spanning three continents, and three decades in CxO roles driving exceptional growth in revenue and profitability, I now work with and coach other business owners and CxOs to reach even greater heights.
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Related Posts
If you’d like to learn more about sustainable business growth, leadership and the areas we’ve covered here, the following articles and posts might also be of interest:
- Drive your Business by Looking Through the Windscreen Not the Rear-View Mirror
- Mastering Financial Compliance: A Practical Guide for SME Leaders
- Navigating the Waters of Expense: Cost Management Techniques to Boost Profitability
- Mastering Cash Flow: The Lifeblood of Your Business
- Harmony in Business: Prioritising the Orchestration of Revenue, Profit Margins, and Cash Flow
- The Quarterly Review: Course Correction or Carry On?
- How Resilient is Your Business? Preparing for Risk
- Boards Accelerate Success & Increase Value for Small Companies, Too
- The Role & Responsibilities of the Company Board
- 1 Critical 5-Word Question for All Businesses
- Directors – Are You Risking Your Assets?
- Why a Proper Board is Essential, Even for Small Businesses –
- Know Your Company Role(s)
- How Independent NEDs Can Catapult Growth in a Small Business
- Why Even Small Companies Need Regular Board Meetings
- Essential Skills of a Top Team as Your Business Grows
Backgrounders
HBR – How Managers Should Read Financial Statements – HBR Video
Fast Company – Is your small business financially fit for the future?
Forbes – Mastering The Basics Of Business Finance Management
Business News Daily – 10 Tips for Managing Small Business Finances
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