The Importance of "Financial Management"
By: Eric Giltner
Senior Area Manager
Grand Forks Area Office
North Dakota District Office
All businesses are designed to compete and succeed in the marketplace through the use of a “Unique Selling Point or USP.” This allows the business to stand apart from the competition and it gives customers a compelling reason to purchase products or services from that particular business. The USP can be derived from several areas such as providing exemplary customer service, taking advantage of a strategic location, relying on a particular skill or expertise of the owner, or the presence of a superb and appealing product line.
However, for any business to succeed and grow in the long run, this unique selling point needs to be matched with a strong financial management plan. For most business owners, finding that USP is the easy part. But figuring out solutions to complex financing problems? Now that is the challenge!
Financial management covers a wide range of tasks and responsibilities. Here are some of the main areas for a business owner to monitor to ensure a sound financial base for his or her business.
It is important to do a regular review of the expenses incurred by the business, especially when employees are authorized to spend on behalf of the business. Each line item should be questioned from the standpoints of necessity and worth. One owner took a hard look at the phone bill and realized the business did not need six separate, hard-line numbers. The six numbers were needed at one time, but that was before the advent of cell phones. Another owner took a look at a seldom used, yet expensive piece of equipment that was incurring maintenance, insurance, and storage costs. The business discovered it could rent this machine when needed and save on the overall costs, plus the dollars realized from selling the equipment could be used for more useful purposes.
Monthly Cash Flow Analysis
Cash flow analysis compares cash revenues (aka inflows) with cash outlays (aka outflows) of a business on a month-by-month basis. This allows for the consideration of how seasonal factors impact the cash flows of the business. For example, many retail businesses will slow down expenditures in January and February due to a reduction in post-holiday spending by consumers. It also makes it easier to plan for growth and reserve funds for equipment needed to meet an expected increase in sales.
Ratio Analysis compares the financial ‘health’ of the business to industry norms and to historical financial measures of the business as well. Several broad categories include: Growth, Efficiency, Profitability, and Liquidity. Growth ratios provide an indication of how the business is handling an increase in sales. For example, sales may be up 15% from the previous year – a good thing! However, if related costs have increased by 30%, then there is a problem. Perhaps this growth has been achieved from using employee overtime and high-cost inventory purchasing options
Credit and Collections
The extension of credit is a powerful tool to use for increasing sales; however, it does impose a greater risk. Businesses need to develop policies related to who is granted credit and the terms associated with credit sales. In addition, the business needs to have an aggressive and timely strategy for addressing those customers who are late with payments. The longer an account goes unpaid, the likelihood of collection decreases.
The economic landscape is littered with businesses who, despite having a sustainable advantage or USP, have failed due to insufficient financial controls. Business owners need to either learn financial management skills or reach out to consultants to assist them in securing the financial future of their companies. For more information on financial management techniques visit www.sba.gov.
Eric Giltner has been a Business Development Specialist and the Grand Forks area manager for the U.S. Small Business Administration since 1998, having formerly been assistant to the dean of the UND College of Business and Public Administration. He can be reached at firstname.lastname@example.org.