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.
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