Money management in your business is business finances, and I had a client say to me that they had no idea what I was talking about when I refer to money management in your business as managing your business finances. Let’s get really clear on what business finances are and how you should be managing them.
So what is business finance? Business finance is one of the functional areas of business, along with marketing, management, human resources, information technology, and production management. It is one of the most important functional areas because finance is essentially the lifeblood of businesses. The finance function, which is related to accounting, is responsible for pumping money to the other operational areas of the business.
Money is allocated for daily operations and special projects, in appropriate amounts, by the finance function. The goal of a business firm should be to allocate money to the functional areas of the company in a manner that maximizes the wealth of the owners. That is the responsibility of business finance.
Now before I continue, I hope your eyes aren’t glazing over and you’re just about ready to fall asleep. Because I want this to be fun! When you are managing your own money and watching that money roll in and grow, that is a very exciting feeling. You work hard for your money, so the idea of keeping as much as you can for your business should really excite you.
If you want to learn more about business finance I have created the Biz Finance Basics course that will show you what you need to know about your accounting system and understanding the role of taxes in your business, your business structure, components of financial reports and so much more. Sign up now for Biz Finance Basics!
Managing your books and your money goes so much further than completing a tax return
When you use your financial reports as a tool in your business it will help you make more money. I want you to see the possibility that lies in knowing your business numbers.
Business finance is one of the most important areas of a company since money and managing profit is the driving force of a business. Accounting is responsible for taking the raw financial data generated by a business and developing the financial statements for the business owner. Finance, in turn, steps in to read and analyze the financial statements and supporting documentation.
The finance function uses financial statements to plan for, obtain, and manage the business’s money.
Essentially what happens is the data gets inputted into your bookkeeping system, then you run reports based off that data. It is essential that the data which is are the transactions of the business such as money you have earned and expenses you have paid in your business.
The business finance function is responsible for the management of the company’s money, the process of obtaining funds for the company, and the management of how much risk the company should take in order to return an adequate amount of money to the owner(s).
In a small business, business owners and managers should have a basic understanding of business finance even if they outsource certain areas of their financial operations. For example, a small business may outsource at least part of its bookkeeping and accounting. Becoming familiar with the basics of business finance can give an owner some additional tools to help understand the financial complexities of business ownership.
Regardless of how you manage your bookkeeping and accounting within your business, you should never check out on overseeing your business finances. You are the CEO of your business and being a top CEO means that you understand how your money is managed in your business.
CEOs of large companies always have CFOs to guide them in their business. There’s a saying that if you want to know what’s really going on in your business, ask an accountant. And that is the truth. We as accountants have been trained to read the stories and feedback that your numbers are telling you. We read financial reports and we can pick up on where the financial weaknesses and strengths are.
This is good information that you need to be paying attention to.
And you need to take the emotion out of that feedback, because whether it is a positive, negative, or neutral story, there is nothing personal in business. This is just information that directs you on how to manage your business. And it’s valuable information.
Let’s say for example you are a product-based business and you sell 4 offers. One of them you consider being your bestseller because that’s what customers seem to really want, so you put all your efforts into promoting it. But when you use the financial reports, you realize that offer 2 is your most profitable, which means you make the most money on it, by a lot. So, wouldn’t you want to promote the offer that makes the most money rather than the one that doesn’t?
Corporate finance is a broad description of the planning, management, and control of a company’s money. Corporate finance includes working capital management, financial statement analysis, cash budgeting, capital budgeting, and more.
What this means is you are creating a financial plan for your business.
In a small business, the owner/manager conducts the daily financial operations of the company. In larger businesses, daily finance decisions may be made by the owner/manager, along with a finance committee or an advisory board. I will definitely touch on the role of advisory boards in a later episode, but for now, we’ll stick with the internal function of business finance.
I hope the explanation I’ve offered makes sense. It can get confusing if you get lost in the business language of the explanation, but when we strip all that away we can get to the heart of the matter.
Jackie’s story about managing her business finances
I’m going to share with you a story about a client of mine and we’re going to call her Jackie. I just literally made up that name, so please know that I am not sharing personal client information. And I’ll start by saying Jackie’s story is not unique – I have seen many Jackies throughout my years in business so maybe this story will resonate with you as well.
Jackie was managing her business finances on her own, and like so many other entrepreneurs, Jackie was measuring the success of her business by the amount of money that she had in her bank account.
Having been cash-infused with venture capital funding with several hundreds of thousands of dollars in the bank for her product-based business, Jackie felt that she was set financially. So off to work she went getting systems in place and building her business. Of course, at the outset of the business, you experience a huge outflow in cash and not a lot of incoming cash. This is the time period where you really need to be monitoring the money in your business.
Unfortunately, Jackie wasn’t aware of this. Jackie just kept monitoring the progress by her cash balance. If there was money in the account, she felt she had the cash to cover it.
Until she noticed the money was running out. By the time she realized that she was cash poor in the business, it was almost too late. It required her to take some serious action and efforts to save her business from going bankrupt before it even had a chance to get off the ground.
This meant serious action of selling and getting money in the door in order to meet their financial obligations.
Some businesses make it through that very scary and tough time, and unfortunately, a lot of businesses don’t. the statistics are very real when I tell you that 87% of businesses fail due to financial mismanagement.
It sounds overwhelming but when you have a good system in place you can manage your business finances painlessly. in fact, you get into such a routine that you won’t even notice it after a while. and you will get massive benefits from tracking your financial plan.
My job as a Business Finance Coach is to take that overwhelm out of the equation and teach you step by step, in manageable pieces, what you need to know to manage your business.
I’m not teaching you to be an accountant, I am teaching you how to be a better entrepreneur. A better CEO of your business.
Why it’s important to learn business finance 101
It’s not everyone’s dream to learn business finance basics, but for business owners and entrepreneurs, this information is essential. All too often in my 20-year career, I have seen entrepreneurs make big business mistakes that can be traced back to not knowing their numbers and could have been avoided, so I decided to make it my mission in life to ensure I help teach business owners and entrepreneurs the importance of business finance.
Business finance sounds like a snooty concept, but really it is managing the money well within your business. Cash management and financial planning fall under business finance, along with financial statements, the accounting function, having a financial system in place, and so much more.
When entrepreneurs learn business finance basics, they will excel at business and make a profit. The goal of a business is to make money, so if you are not making money in your business, or don’t even know if you are making money, you need this blog.
Bookmark this website in your favourites tab and read on, as there will be a ton of information for business owners to refer to. I will be updating this website regularly with new and valuable content.
Business finance for beginners
If you are new to the concept of business finance, let’s review the objective and importance of business finance.
Importance of studying business finance
If you are a business owner, it is your responsibility to be financially informed. You may outsource your bookkeeping function and work with your accountant, but if you have checked out of the money side of your business, that is a disservice to your business.
Learn business finance basics
A business finance 101 course might come in handy, but right now I want to give you an overview of the finance function in the business.
- Bookkeeping
- Financial reports
- Budget and monitoring
- Cash Management
We will have a closer look at each business finance category.
Bookkeeping for business finances
The bookkeeping function is the record-keeping of the business. As a business, you are responsible for the management of the financial transactions that bring money in and out of the business. You need to keep these transactions recorded so that you can determine the profit or loss of your business for tax purposes. It is your responsibility to report to your government every year.
Whether you are completing the bookkeeping on your own or you have hired a bookkeeper to help with this function, you need to understand that this function is an extremely important function. It needs to be accurate in order to produce reliable financial reports.
Bookkeeping is essentially the data storage of the business. All business finance decisions are based on the reliability of this financial data.
Financial reports that help you manage your business finances
It is important to get to know your financial reports. For small business financial management, there are three important financial reports that you need to know. They are your balance sheet, your income statement (also known as a profit & loss statement), and your statement of cash flow.
The balance sheet will reflect the value of the company through the portrayal of the company’s assets, less its liabilities. What remains is the shareholder equity, which is the value of the company if it were to be liquidated.
The income statement shows the profit or loss of business activities within a time period of usually a year. All the revenue that the business received for that year is recorded and all the expenses that the business paid out to support the business are subtracted from that revenue. The remaining balance is the profit (if the business revenue exceeded the expenses) or a loss (if the expenses were greater than the revenue the business brought in for the year).
The statement of cash flow measures the activity of the cash flowing in and out of the business for a specified time period, typically the fiscal year of the business.
For small businesses, the purpose of the financial statements is that they are required if seeking out investors.
Creating a budget for your business to help manage your business finances
In my opinion, having a budget, also known as a financial plan, for your business is one of the smartest things you can do as a business owner.
One of the most important activities you can do for your business to ensure you reap financial success is to plan. Planning gives your business a clear direction when mapping out your goals. You plan on the direction you would like the business to go, and the plan maps out how you will achieve those goals. This plan is known as a budget, and often business owners do not like to budget because it can feel like a constriction.
But have you considered how much a budget can offer you?
Budgeting and financial planning offers an opportunity to construct scenarios with various factors playing in, such as planned sales increases, payroll increases, cost per unit increases, and the list goes on. Depending on the business size and how many moving parts there are in the planning process, the organization and scenario building for this information can get complicated.
There is software out there that makes it simple for businesses to manage their financial budget, map out a hiring plan to include salary increases, financial models, and cash runway forecasts, all without having to manage other software programs or hire a CFO.
The top benefits of budgeting:
- Offers a plan and clear direction for your business goals
In a budget, you can break down the cost drivers to smaller detail, so much so that if it is essential to understand the cost of screws when building your revenue model, you can do that.
2. Offers the ability to incorporate cost increases in your plan to ensure you can keep your profit margins healthy.
As costs increase over time due to inflation and variable cost increases, these can efficiently be planned for during the budget and planning phase. Having a reliable budgeting system in place makes the process more efficient and saves time for you.
3. Gives you a basis for monitoring your progress towards these goals.
Budgets are typically broken down into monthly increments, which allows the user to monitor their actual progress against their budgeted performance on a monthly basis. This process allows the opportunity for the business owner to react quickly to potential issues and correct them before the problems turn into more significant issues, and money sucks.
4. Allows you to understand your business on a much deeper level.
When you break down your costs, it allows you to take a deep dive into your business and understand what drives your costs up and how the business decisions you make daily affect your bottom line. Knowing your numbers is the best way you can increase the profitability of your business.
5. Offers a clear understanding of where you either met, fell short, or exceeded the planned goals.
As you monitor your results against your planned numbers, you will see clearly where goals fell short and where you stand financially in your business. If you have a money leak, you will quickly plug it, and that could be a potentially considerable cost-saving as if it went undetected, it could force the business to lose large amounts of money.
It is in your best interest as a business owner to ensure you plan for your business’s future. Knowing your numbers is the best way to keep your business dollars, thereby making it more profitable. Having tools that simplify the process goes a long way in saving time and money.
Cash management for business finances
Have you ever found your business was short on cash and you were struggling to meet the financial obligations? You have money coming in but it goes out the door just as quickly.
Cash shortages can be a sign of trouble within your business. Cash is the lifeline of the business, and to be short on cash keeps you from meeting your financial obligations. And if you can’t meet your financial obligations, you will soon be shutting your doors. A cash shortage is one of the primary reasons businesses go bankrupt.
Being short on cash is a very stressful and unpleasant place to be. There are many benefits to effective cash management which include less stress, confidence in knowing that you will be able to meet your financial obligations, and an understanding of when payments from clients will be arriving in your bank account. Having a cash management system in place minimizes risk against your business.
Tips on effective cash management to ensure the business finance function is well served
Point of sale payment
In order to get payments in the door quickly, the best way to do that is to ask for payment upfront. When clients pay for services before they receive them, it is the best way to ensure timely payment.
Prompt invoicing
If the first suggestion is not an option, then the best alternative is to invoice on the day that the contract is signed. This ensures that your invoicing terms have started immediately and there should be no delay in payment.
Timely reminders of late payment
Run your aged accounts receivable reports on a weekly basis and ensure prompt follow-up with those who have outstanding payments. When you catch discrepancies earlier rather than later it is easier to resolve the issue.
Offer discounts for quick payment
When you are looking for timely payments, it is a good idea to offer a small discount to those who pay early, so it gives them an incentive.
Emergency cash balance
If you are able to save some cash for an emergency fund, it is suggested that you keep it aside for emergency cash shortages. An alternative is to have a revolving line of credit where you can dip into when experiencing cash shortages.
Summarizing learning business finance basics
The bottom line is managing your business finances is an essential part of business, even small business finance management. Regardless of the size of the business, business finance management for beginners may seem tough, but it is definitely worth the investment of time and energy.
If you need to learn more about the basics of business finances, check out this introductory course to business finances, Biz Finance Basics. I created this course to help entrepreneurs and business owners learn and understand business finance basics.
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