The management of business finance has implications for both long-term profitability as well as day-to-day operations. The financial aspect of an organisation affects everything from expansion and profitability to staffing and marketing. Learning to manage business finance is an integral part of running a successful business, whether your organisation is a small business or a large enterprise.
Understanding statements
There are three major financial statements that every business owner should be familiar with: the profit and loss statement, the cash-flow statement, and the balance sheet.
- Profit and loss statement – This is an income statement that summarises your income and expenses within a date range.
- Cash-flow statement – This is a summary of money entering and exiting your business within a date range.
- Balance sheet – This is a ‘point-in-time’ view of the financial status of your business on a given day, and it provides a picture of the assets, liabilities and net worth of your business.
There are many other types of financial statements that can be used to gain insights into a business. Understanding financial statements sets a foundation for making the business decisions for improving operations, addressing risks, and better managing expenses.
Analysing finances
In addition to interpreting financial statements, business owners can benefit from analysing financial data. Many business owners use financial ratios, calculations or formulas to interpret raw financial data. There are different ratios or formulas for analysing liquidity, finance, sales, efficiency, profit, and much more.
A basic example is the sales margin, which indicates the percentage of a sale that is profit. Profit ratios include the gross-profit-margin ratio and the return on investment. The working-capital ratio is an indicator of your business liquidity, while the accounts-receivable-turnover ratio is an indicator of your effectiveness at collecting debt from customers.
Managing cash flow
As many as 41% of failed businesses nominate poor cash flow as the cause of their business failure. A sign that the business needs more financing or a shift in strategy is when the business records a negative cash-flow balance.
Cash flow can be reviewed in at least three ways. The business owner can analyse cash flow with respect to operating activities. These are the day-to-day buying and selling of goods and services. Cash flow can also be reviewed in terms of investing activities, or the buying and selling of fixed assets. Finally, cash flow can be analysed with respect to financing activities, such as any business loans taken out.
Using software
Utilising the right bookkeeping and accounting software keeps your records accurate so that you stay informed as a business owner. There are many different software programs available on the market, but ideally the program that you use will include payroll and task-management tools.
Your software should allow you to sync with bank accounts, record foreign currency transactions, and track records by departments. Ensure that software is set up in accordance with tax and recording requirements.
Seeking advice
Managing your business finances can mean dealing with highly technical and compliance issues, and many businesses have a dedicated accounting department or seek help from accountants. Interpreting financial statements, preparing returns, obtaining business financing, and setting up and maintaining a bookkeeping system are some of the technical areas in which a business might require assistance.
