OK, so it's important to manage your finances, but what exactly does that mean? Financial Management is the process of monitoring, organizing and controlling the financial components of your business in order to achieve your financial objectives. It puts you in the financial driver's seat, giving you the ability to make informed financial decisions, rather than reacting to your financial situation.
If you don't control your finances, they will eventually control you. You'll be constantly drawn into “fire-fighting” mode, robbing Peter to pay Paul, and never really feeling secure about your financial situation. Financial Management gives you control over your finances by organizing and analyzing the movement of money in and out of your business.
In this section we'll take a simple yet practical approach to Financial Management. We'll review some basic accounting principles. But more importantly, we'll develop a series of practical financial tools to grow your business.
To be truly effective, Financial Management must become the responsibility of everyone in your business. Every employee in every department plays a financial role whether they realize it or not. For example, an installer may be able to save the company money by finding a way to get more done in less time, or a purchaser may be able to save the company money by making more economical purchases. In essence, everyone in your company is a “financial manager” because every aspect of your business is connected to money in some way.
Marie, the owner of a French distribution company, was facing tough times. An extended bus strike and poor weather conditions had contributed to a decrease in summer tourism. The result was a 20 percent decrease in her clients' customer volume during what was typically the busiest time of year. Marie knew she would soon face a cash crunch if she didn't do something to boost sales and cut costs in a hurry.
To make the kind of changes she needed in a short time frame, Marie needed the co-operation of her entire staff. She knew her business as a whole better than anyone, but her employees were masters of the details. Marie held an emergency staff meeting to explain the situation to her employees and asked everyone to find at least one way to either boost profits or decrease expenses, no matter how small, within their sphere of influence over the next month. She also promised to return some of those savings to her employees, once the company was out of the danger zone.
As a result, the purchaser found a less expensive main supplier, the head shipper developed a less expensive method of packaging some of the products without decreasing the quality of service, the sales people conducted more meetings remotely, the sales people also increased the average sale per customer by offering more samples and suggesting new products at the time of the sale, and Marie negotiated a decrease in rent from the building owner in return for a longer lease and fixed rental increases in subsequent years. In the end, Marie made it successfully through the summer and by maintaining these and other improvements when times improved, she was able to give her employees some nice bonuses as well.
One of the keys to eliminating the “pass the buck” mentality and encouraging everyone to make better financial decisions is empowerment. People will naturally take an interest if they feel a sense of pride and ownership for their work, so stay constantly on the lookout for new ways to help your employees connect their personal goals with your company's goals. Sure it's easier said than done, but the rewards of conscious, caring employees make it worth the effort.
In order to be more productive, your employees must have a direct relationship to the value they bring to the organization as a whole. This is where management and finance come together.
- Your employees must understand their purpose within the organization as a whole.
- Your employees must have clear, definable goals concerning their work.
- They must understand how these goals directly contribute to the goals of the organization as a whole.
- Their progress toward these goals must be monitored. This information must be regularly reviewed with them.
- They must be able to monitor their own progress.
- They must have the skills, tools and authority to make improvements that will result in increased productivity.
- They must be acknowledged or rewarded for making those improvements.
Acknowledging your employees' contributions when jobs are completed ahead of schedule or under-budget is the first step toward encouraging financial self-management. Keeping them “in the know” is the second. Be constantly on the lookout for ways to encourage your employees to take ownership of their work. The benefits of a self-driven workforce are more than worth the effort.
"If you can't measure it, you can't manage it."
In this section we'll examine your business from a financial perspective. We'll begin with your management related financial activities, and then we'll have a closer look at the numbers.
Organizational Structure First we'll review and update the financial components of your organizational structure. You set this process in motion in the Management, but now is a good time to take a second look at your financial structure.
Financial Control Systems Here we'll design the systems that control the flow of money into and out of your business. We'll put your financial activities on autopilot by writing and implementing control systems that will operate the financial aspects of your business in a predictable and consistent manner. It's imperative that you have confidence in the way your money is being managed. Solid financial control systems ensure that the information you receive is a true reflection of what's actually happening in your business.
Bookkeeping and Accounting The next step is to organize the systems that record the flow of your money. These are your bookkeeping and accounting systems. You don't need to become an accountant, but you do need to understand what your bookkeeper and accountant are doing with your money and why. Otherwise you become a bystander in a process that you should be leading.
Financial Analysis When used properly, your financial statements are a wealth of information about the health of your business. In this section we'll have a look at the most important information you can derive from your financial statements to help you make better business decisions.
Budgeting We'll then prepare budgets to help guide you toward your Strategic Objective. It's difficult to arrive someplace you have never been without a map. Budgets are your financial road maps.
Cash Management and Financing Cash is the lifeblood of any business, so next we'll make sure you have what you need, and that you are as efficient as possible with what you have. A business can survive without profit for a while, but it cannot survive without cash. Certainly profit is your best source of cash, but it is by no means your only source. Here we'll examine the many sources of cash available to you and how to use them to your best advantage.
Pricing The price you charge for your products and services is strongly influenced by your Marketing Strategy, but it's a financial concern as well. Here we'll review your pricing structure from a financial perspective. Our goal will be to find a pricing structure that fits with your Marketing Strategy, while maximizing your profits.