Why good financial management is so essential

Good financial management is essential to the survival and success of every business. Unfortunately, many small business owners have relatively limited exposure to financial management and are unaware of how strategically important it is to their business’s performance.

In general, financial management deals with the procurement of funds for a business and the effective use of those funds in the operations of the business. It also involves using accounting numbers to measure the financial health of a business, to understand the reasons for the current financial position, and to make strategic decisions that will improve the general performance of the business.

The best way to demonstrate the importance of good financial management is to describe some of the tasks that it involves:

• Taking care not to over-invest in fixed assets
• Ensuring that there is a sufficient level of short-term working capital to sustain and manage accounts receivables and inventory
• Setting sales revenue targets that will deliver growth
• Increasing gross profit by setting the correct pricing for products or services, reducing the costs of raw materials, negotiating supplier prices, and managing other factors that influence the costs of production or service provision
• Controlling the level of general and administrative expenses by finding more cost-efficient ways of running the day-to-day business operations
• Tax planning that will minimise the taxes a business has to pay
• Managing employee benefits
• Performing financial analysis using numbers generated from financial statements.

Good financial management begins with a solid book-keeping system that will allow for the production of accurate financial statements. It requires knowledge of how to use the figures in the financial statements to the business’s advantage. For example, a good financial manager should know that a positive net profit and an increase in sales does not automatically translate into financial success. If the business’s borrowed capital has increased at a rate higher than the increase in profits or sales, it means the company is financially worse-off than it previously was. Are you and your management team aware of this?

There are many other strategic mistakes that managers who are unfamiliar or untrained in financial management make. Over time these mistakes can become detrimental to a business’s success and survival so it is crucial that you learn as much as possible about how to financially manage your small business. If you have trouble with this, you may want to consider soliciting the services of a professional who knows the ins and outs of the process.

For more information on financial management, have a look at my article "Impress your bank manager! How to read your profit and loss account report".