Small Businesses run the gambit from online entrepreneurs to those who launch satellites into space, and just about everything in between. While certainly different in their missions and business plans, the one similarity that all small businesses have is the need to understand financial management. This is a broad, but basic concept that offers many benefits to you as the business owner. Financial management includes bookkeeping, projections, financial statements, and financing, which forms the foundation for reaching your goals through sound business decisions. One of the surest ways to bankruptcy is not understanding your finances, or outsourcing them entirely to a bookkeeper or CPA.
Certainly both of the before mentioned roles will be utilized in your business, but it can’t be based upon 100% trust. Let’s take a look at a few bullet points to see what exactly financial management is.
- Financial management is the way you know if you are making a profit.
- Financial management helps you decide what you can afford in terms of store or office location, inventory purchases, employees, and equipment.
- You need sound financial information to set your prices and select your vendors.
- Financial management gives you the tools to plan for overall business growth, for diversification of your product lines, or for reaching new markets.
- Financial management helps you decide which products, services, and markets are profitable.
Let’s drill down a little bit and look at some of the main categories of financial management that will be important to you.
Budgeting: Creating a budget is the first place to start with your financial management practice. Budgeting will provide you the ability to:
- Track all your business expenses
- Plan for the future
- Economize when you need to
- Plan for expansion
- Make a profit
Use the following template to help you categorize your monthly expenses.
Bookkeeping: Bookkeeping is the organized process of tracking all income and expense transactions, usually on a daily basis. A business would record transactions which would include.
- Expense payments to suppliers
- Loan payments
- Customer payments for invoices
- Monitoring asset depreciation
- Generating financial reports
Cash Flow: Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows, or more specifically, maximize long-term free cash flow. While some businesses run their financial statements on a cash flow basis, it is not the norm. However, you still always need to know the balance of cash received less the amount of cash paid out over a period of time. The following is a simplistic example of what a cash flow statement looks like. Remember, you will utilize software to create forms like this, but it is imperative that you know what data is going in. As the saying goes, garbage in – garbage out.
In the next sequence of basic financial management for small businesses, we will cover:
- Profit and Loss Statements
- Business Financing
- Loans and Start-up Financing