A good financial management system tells you how your business is doing--and why.
While a well-organized bookkeeping system is vital, even morecritical is what you do with it to establish your methods forfinancial management and control.
Think of your bookkeeping system as the body of a car. A carbody can be engineered, painted and finished to look sleek andpowerful. However, the car body won't get anywhere without anengine. Your financial management system is the engine that willmake 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 putyour numbers to work to make your business more successful. With agood financial management system, you will know not only how yourbusiness is doing financially, but why. And you will be able to useit to make decisions to improve the operation of your business.
Why is financial management important? Because a good financialmanagement system enables you to accomplish important big pictureand daily financial objectives. A good financial management systemhelps 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 forfinancing needs, but sharing your budget with your banker will helpin 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 financialconsiderations.
Financial planning and control help you become a bettermicromanager by enabling you to:
1. Avoid investing too much money in fixed assets.
2. Maintain short-term working capital needs to support accountsreceivable 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 moreeffectively or by reducing supplier prices, direct labor, etc.,that affect cost of goods sold.
5. Operate your business more efficiently by keeping selling andgeneral and administrative expenses down more effectively.
6. Perform tax planning.
7. Plan ahead for employee benefits.
8. Perform sensitivity analysis with the different financialvariables involved.
The first step in developing a financial management system isthe creation of financial statements. To manage proactively, youshould plan to generate financial statements on a monthly basis.Your financial statements should include an income statement, abalance sheet and a cash flow statement.
A good automated accounting software package will create themonthly financial statements for you. If your bookkeeping system ismanual, you still can use an internal or external bookkeeper toprovide you with monthly financial statements.
Excerpted from Start Your Own Business: The Only Start-UpBook You'll Ever Need, by Rieva Lesonsky and the Staff ofEntrepreneur Magazine, © 1998 Entrepreneur Press
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