Why SMEs need to understand the importance of Good Financial Management

Many businesses, especially start-ups shy away from the financials of their business.

Accountants more and more are trying to encourage companies to take more interest in their financials as we know that the company who understands its financial numbers has a better chance of success than one who delegates or hides from the figures.

As a start point though it is important to understand what is good financial management and why is it important?

 

What is Good Financial Management in Business?

Financial Management in business is the regular collection, analysis and review of the financial numbers. It involves ensuring that key figures on costs, sales and profit and are collected to enable the scrutiny of these on a regular monthly basis. Good financial management systems ensure that the figures are accurate and timely and that there is also a system of control in place to flag where spending and or poor decision making is leading to a fall in the profits of the company. Financial management is the key input into providing management information. Management information is the information which drives the quality of your business actions and decision making.

 

Why is Good Financial Management important to SMEs?

SMEs grow in their need for a financial management system. Normally this need starts as the business grows out of its initial start-up phase, typically after 1 or more years of trading, but with some fast growing businesses this may be just a few months after launch. As the business pushes for increasing its sales it is important to be able to flag where costs are moving disproportionately to sales. No one wants to end up in the scenario of running harder to make the same profits but this is a common mistake made by SMEs. On a monthly basis, it is important to know how the company is performing. Leaving the analysis to the end of the year means that if the company starts to fail in it performance this is not picked up quickly enough to have the time to take action to remedy.

Financial Management grows with the size of the business. In the very first instance the tax and annual returns must be made, however the information collected in order to make these returns is the basis for good management information which gives a direct benefit back to the business owner. This information can be used as the starting block for the collection of non-financial measures. These measures are the indicators which will really give you the insight into how your business is being influenced by the actions and decisions you are currently taking.

 

For larger companies, where high level decisions are made in order to push the company on, it is important to be able to financially evaluate what could be the outcomes from changing or adapting the business. If there are no systems in place to capture the actual results of the business it is difficult for the business to pull out the necessary data it needs to produce forecasts for potential outcomes. The business will then be driving the direction of the company ‘blind’ without any feel for what are the potential range of outcomes and what this means in terms of cash required to fund growth. In the worst case, this can lead to business failure as the business simply runs out of cash.

Without a careful evaluation of cash requirements, time and resource constraints, the managing of the business becomes harder and more stressful with less chance of success.

If you are still unsure if your business needs to improve its financial management why not take a look at my tailored Financial Management Reviews. they are available to all businesses located in the Bristol and Bath, Uk area and will help reduce the worry of not knowing if your business is at financial risk.

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