Managing your business finances effectively

Effective management of your finances enables you to be much more effective and profitable in the way you run your business. By keeping better track of your finances and using the financial information you have to better effect, you have a degree of control.

Most business owners are not accountants but we DO need to make use of what the financial figures are telling us. You need to do this on a regular and ongoing basis. For most of us, most of the time, the practise of accountancy can be gobbledegook. In some ways this is as it should be. After all accountants need to go through many years’ of study to get properly qualified. We should trust our accountants to “get it right” for us and for the most part, they will. However most will not be managing your finances on a regular week by week and month by month basis.

We must trust ourselves rather than others, to know and understand how to run our businesses. Because we are so close to it, it is only really us that knows what is happening and understands properly the impacts on our business. I will argue two fundamental points:

We cannot run our businesses as well as we should, without an up to date knowledge of what is happening with costs and income, and
It is not hard or complicated, it is common sense.

Taking Management Action

We need to take action in our business depending on what is going on around us. This includes what has already happened, but much more importantly what we think is going to happen, some examples:

Are these customers going to continue to place orders with us?
Are our utility costs going to go up?
Have we a Sales Drive coming up that will deliver us lots of new orders?
Are there some changes in legislation that are going to affect us?
Do we have some machinery that is nearing the end of its life and needs replacing?

The list is endless, but is actually the list of things we constantly think about when running our business. They all have some form of financial impact, and we can plan for it, and forecast the impacts.

Forecasting

It is important that we have a forecast of what is going to happen. Most of the time when I talk to business owners, they say that they cannot predict what is going to happen. I’ve lost count of how many times I have heard; “we cannot predict our future business”. I contend that this is actually not true and it is the forecast that will tell us what actions we should be taking. At least then we have a chance of:

Mitigating any potential problems we can see coming, and
Taking best advantage of opportunities there are

Cash Flow

Cash is King, and there are many, many good works that go through this in depth. In fact it is not hard to do a cash flow forecast, but it is vital. Forecasting cash flow need not be an onerous task. There is not necessarily a need to do it weekly, but it is very important to be able to see when the bank balance is likely to dip. You should always have good relationships with your customers, and it is very important to be firm about when they pay. After all they owe you the money and you are entitled to it.

Monitoring

In most cases, our accountants will do our annual accounts some time after the end of the year. A good accountant will provide some analysis of the differences between these accounts and the previous years’ accounts. I argue that this is all very interesting but completely useless in the day to day running of our business. It is all ancient history. We need to watch what is happening NOW, and what is going to happen. Only then can we actually do something about it. A simple (monthly) monitoring system is critical.

Summary

Simple, practical and straight-forward basic financial forecasting is the real key to a successful business. Monitoring the finances properly does two things:

It means you don’t leave tackling issues until it is too late
It enables you to be positive and pro-active with making the most of business opportunities

If you would like a free, no obligation chat about developing some effective financial management processes, please call or drop us a short email.