Why Small Businesses Need Financial Management

Financial management is for large corporations only, right? Wrong! Every business needs it to be truly successful, but many small business owners are not financial managers, so they perform only the smallest amount of financial management they can.

What is financial management, exactly? This important function can be broken down into three components: Count, Control and Capital.

There is one more component that is an important part of the financial planning process: the Chief Financial Officer (CFO). The CFO's role is to counsel management on what to do with the information gained from the other components.

Count: Make the Numbers Work for You

Bookkeeping is the one function that every business has, at least at a basic level-without it, you would not know how much money you have coming in or going out. This can often be done by the small business owner with a software program. These financial statements are important to anyone looking to enter any kind of financial partnership with your company-such as giving you a loan.

However, there is more that can be done with the statements and reports from your bookkeeper. An accountant can determine the health of your company based on those numbers-and that is something that a software program cannot do. You can use this insight to make financial decisions for your small business, like whether you need to change your pricing structure, take out a corporate loan or expand your business.

Financial statements have another use: to set benchmarks to help you determine whether your business is growing at the rate you planned. These benchmarks can also be used to compare your company to others in your industry of similar size and type to see how you compare to your competitors.

Control: Predicting the Future of your Small Business

The control function of financial management produces annual forecasts, operating and capital budgets, and implements strategic financial plans. In addition, a risk assessment is a valuable tool in finding and mitigating the risks for your company.

This is a function that small businesses often put off or avoid all together, because they do not have the time or knowledge to do it. However, these actions are vital to put your small business in the best possible position to increase profits and reduce losses at every opportunity. These forecasts and plans allow you to act before a problem happens to prevent or lessen it-not react after the fact when you have less control.

Capital: Manage the Money

Putting available capital to the best use is vital to any company's success. In the highly competitive marketplace today, you need to every edge you can get to beat out your competitors. Not only must you manage the cash you have to maximum potential, but you also must know when to borrow money to take advantage of opportunities in the marketplace. This is another area where small business owners often fall short.

CFO: Make use of the Knowledge

In order to make the most use of the information from the reports, forecasts and budgets, you need someone who knows how to use it. This is the purpose of the CFO, to apply his knowledge to all of the forecasts, financial reports and analyses to advise management on the best financial plan for the company and how to proceed.

When small businesses utilize all of these aspects of financial management, only then can they reach their full potential.