One of the most crucial duties of business owners and managers is financial management. They must take into account the potential effects of their management choices on revenues, cash flow, and the company’s financial health. Every facet of a company’s operations has an effect on its financial performance, thus the owner must assess and manage them all.
1. Cycles a Business Goes Through
Most businesses lose money and have a negative cash flow when they first start out. The handling of finances is crucial at this time. Even if they have more money going out than coming in during the early months of the business, managers must make sure they have adequate cash on hand to pay staff and suppliers. As a result, the owner must anticipate the financial impact of these negative cash flows so that he can estimate the amount of capital required to sustain the company until it turns a profit.
A firm will require more money as it develops and grows to finance its expansion. It’s critical to plan and budget for these financial requirements. Financial managers make the choice of whether to borrow money from external lenders or use internal resources to finance expansion. Financial management entails locating the most cost-effective source of funding, managing the firm’s cost of capital, and preventing the balance sheet from being overly burdened with debt, which could have a negative impact on the credit rating.
2. Managing Money During Regular Activities
In the course of normal business operations, a company offers a good or service, sells it to a consumer, gets paid, and repeats the process. Cash is being efficiently moved through this cycle by financial management. This entails controlling the inventory turnover ratios of raw materials and completed goods, selling to clients, promptly collecting receivables, and beginning anew by acquiring additional raw materials.
The company needs to pay its suppliers, employees, and bills in the interim. Cash is required for all of this, and smart financial management is required to ensure that the money flows smoothly.
Even though economies have historically grown through time, they may also undergo abrupt drops. Businesses must prepare for these economic downturns by having enough liquidity; otherwise, they risk having to close their doors due to a lack of funds.
3. Financial Activities Reporting
It is the duty of every company to submit reports on its operations. Investors expect regular updates on the performance and safety of their investments. Reports are necessary for state and municipal governments so they can collect sales tax. Business managers need additional reports with KPIs that track the operations of various divisions inside their organisations.
A thorough financial management system can also generate the many kinds of reports that are required by each of these distinct entities.
4. File Taxes and Pay Taxes
To collect taxes, the government is constantly present. Financial management needs to make a plan for paying taxes on time.
Every manager or owner of a small firm should have strong financial management skills. Every action an owner makes has a financial impact on the business, and he must consider these decisions in light of the overall operations of the business.