Key Concepts of Financial Management
Regardless of whether you sell a product or service, operate locally or nationally or sell to consumers or other businesses, many basic financial practices remain the same. During both slow and boom times, it’s important to maintain consisting accounting practices. Understanding key concepts for managing your company’s finances will help you minimize your expenses and maximize your profits.
One of the most important concepts of financial management is budgeting. Spending money without a plan or without regard to your sales can lead to overspending, missed bill payments and decreased profits. Create a master budget each year for your business that includes income and expense projections, a cash flow statement, a balance sheet and a profit-and-loss statement. Perform a budget variance analysis each month or quarter to determine if your budget projections were accurate or if they need to be adjusted.
To make the most effective decisions regarding marketing, distribution strategies, pricing, hiring and other aspects of your business, you’ll need accurate information regarding how each decision you make might affect your bottom line. Accurate and regular financial reporting helps you know exactly where you stand financially, how different areas of your company and different initiatives are performing and what your resources are. A balance sheet lets you see your company’s assets and liabilities at any time. Cash flow reports tell you if you can pay your bills on time or if your collections process is inefficient. Knowing your available credit and what your interest costs are provide important information about your purchasing power and profit margins.
A common reason small businesses struggle or fail is poor cash flow management. Even when income is greater than expenses, you still might find yourself short of cash and unable to pay bills if you don’t time the receipt of your sales invoices with the due dates of your bills. Accurate and timely cash flow statements help you avoid production shutdowns, loss of customers and damage to your credit.
Without proper planning, you will pay more taxes than you need to and risk fines, penalties and liens. Effective tax planning can help you reduce payroll taxes, lower your income tax liability, avoid paying sales taxes late and avoid surprises that arise when you are hit with tax bills larger than you expected. Work with a tax expert to minimize your tax liabilities and meet you obligations on time.
The more debt you carry, the more interest you pay, raising your overhead costs and lowering your profits. Even if you have no problem paying your credit card bills or loan amounts, high debt can lower your credit score, potentially decrease your ability to get more credit when you need it, and raise the interest rates you’ll have to pay on future borrowing. Effective financial planning includes monitoring your debt and managing it on a regular basis.