While a well-organized bookkeeping system is vital, even more
critical is what you do with it to establish your methods for
financial management and control.
Think of your bookkeeping system as the body of a car. A car
body can be engineered, painted and finished to look sleek and
powerful. However, the car body won't get anywhere without an
engine. Your financial management system is the engine that will
make your car achieve peak performance.
You may be wondering what exactly is meant by the term
"financial management." It is the process you use to put
your numbers to work to make your business more successful. With a
good financial management system, you will know not only how your
business is doing financially, but why. And you will be able to use
it to make decisions to improve the operation of your business.
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Why is financial management important? Because a good financial
management system enables you to accomplish important big picture
and daily financial objectives. A good financial management system
helps you become a better macromanager by enabling you to:
1. Manage proactively rather than reactively.
2. Borrow money more easily; not only can you plan ahead for
financing needs, but sharing your budget with your banker will help
in the loan approval process.
3. Provide financial planning information for investors.
4. Make your operation more profitable and efficient.
5. Access a great decision-making tool for key financial
considerations.
Financial planning and control help you become a better
micromanager by enabling you to:
1. Avoid investing too much money in fixed assets.
2. Maintain short-term working capital needs to support accounts
receivable and inventory more efficiently.
3. Set sales goals; you need to be growth-oriented, not just an
"order taker."
4. Improve gross profit margin by pricing your services more
effectively or by reducing supplier prices, direct labor, etc.,
that affect cost of goods sold.
5. Operate your business more efficiently by keeping selling and
general and administrative expenses down more effectively.
6. Perform tax planning.
7. Plan ahead for employee benefits.
8. Perform sensitivity analysis with the different financial
variables involved.
The first step in developing a financial management system is
the creation of financial statements. To manage proactively, you
should plan to generate financial statements on a monthly basis.
Your financial statements should include an income statement, a
balance sheet and a cash flow statement.
A good automated accounting software package will create the
monthly financial statements for you. If your bookkeeping system is
manual, you still can use an internal or external bookkeeper to
provide you with monthly financial statements.
Excerpted from Start Your Own Business: The Only Start-Up
Book You'll Ever Need, by Rieva Lesonsky and the Staff of
Entrepreneur Magazine, © 1998 Entrepreneur Press