What is Financial Management?
Dolapo sanusi- Ola is the CEO and co-founder of Osusumobile.…
Financial management is the act of planning how a business should earn and spend money. Financial management is the foundation of any sustainable business. Good financial management is key to whether a business will continue to exist or go out of business.
Having worked with a lot of small businesses, their biggest issue has always been how best to manage their finances. There are many reasons why small businesses struggle with financial management and a few of them are explained below.
1. Lack of or poor record keeping: Many small business owners do not record their sales and expenses anywhere. I’ve worked with small businesses who will tell you its all in their head. I always tell them, that there is no way that they can remember all their records especially their expenses. Funny enough people remember their sales better. Expenses can easily be overlooked and forgotten. As a business, you do not need a fancy software to record your transactions, you can get a notebook or a ledger book to record all transactions. Always record all transactions no matter how small especially expenses. Examples of expenses normally overlooked include transport costs, food costs for business owners, cleaning costs of shop area etc.
2. Lack of Inventory management: This relates to businesses who trade in goods, a lot of businesses only know how many goods they bought from their supplier but do not keep record of how many are sold daily and what the balance should be at the end of the day. As a business who deals in goods, stock should be counted at the end of everyday. A way to record sales as they occur during the day should also be devised. Getting in a Point of Sale system is the easiest solution to this. There are a lot of cheap and easy to use Point of Sale solutions around now. Most banks offer one.
3. Untracked Sales: It is difficult for some business owners to track how many sales they make daily. This applies to food vendors especially. Apart from using a point of sale machine, food vendors should find a way to establish how many plates of rice on average they should sell from their pot sizes. A solution is to get measuring spoons in to serve the food for consistency and revenue tracking.
4. Reporting: Many small businesses have no weekly reports, monthly reports or yearly reports done. They rely on chance to grow their business. If proper records are kept, different reports can be produced from these records. Reports that can be produced include profit and loss statements, profitability reports per product, cash flow analysis to name a few. These reports help the business owner in making decisions that would help grow the business, help get rid of products that are loss making and make the necessary business decisions that would grow a business.
5. No Business Account: This is one I can not over emphasize, many small businesses do not have a business account and run their business through their personal account. This is the biggest contributor to small business failures. As hard as it could be, please keep a business account separate to a personal account.
6. Financial Planning: Many small businesses do not have a financial plan. Money earned from the business is spent without a plan. As a small business owner, decide from the onset how finances from the business will be spent. Some of the decisions should include paying yourself a salary, getting yourself a pension, what percentage should be re-invested into the business, what percentage should go into setting up another business. Please make sure these decisions are done based on available cash today not on future cash available.
7. Debtor Management: This is a very big issue where small businesses are concerned. The ideal thing is not to sell on credit especially if your business can not afford to. Where you must sell on credit, have a process in place to collect money owed to you. Honestly, you are not a bank – let people who need credit go and get a loan from a bank and then buy from you. Credit sales has killed a lot of small businesses.
While the above 7 points are not an exhaustive list of things that would improve a businesses financial management, the list is indicative of quick wins that can be put in place.