Business Financial Management for Beginners – A Definitive Guide

Business Financial Management for Beginners – A Definitive Guide

Whether you’re aware of it or not, you are practicing financial management. It’s in every business activity you do, from making investment decisions and purchasing new equipment to giving customer credit. It’s all financial management.

What separates a financially savvy business owner from the rest is whether or not they are fully aware of the financial consequences of their money decisions. Crossing the gap between an ignorant decision to an informed and intuitive one is understanding financial management. 

Perhaps you’re one of those business owners who ‘goes with your gut’ when it comes to money matters. But, if those decisions do not positively impact your business, it’s time to consider learning finance. 

After reading this article, you’ll be well-guided on what financial management is. You’ll know some practical steps to learn financial management quickly. You can apply these to your business and get better returns.

Financial Management Explained

Financial management is making sure financial resources are used well. It’s making every penny work for your business. So we manage and control business resources to get the best result.

Apart from making money work, managing finance also involves squeezing more out of every dollar. To do that means profitable decisions have to be made in investing, leveraging, and cash management, and we will discuss those in later sections.

Why Do You Need to Learn Financial Management?

Some may think financial management is just budgeting. If it’s just managing cash and making it grow, then all you need to do is make common sense money decisions that won’t deplete your funds, right? Well, it is only one part of financial management.

The Lemonade Business Example

Let’s take the concept of budgeting and paint a picture. Let’s say you estimate a $10.00 cost to make a lemonade pitcher. You invest the same amount in cash. Then, after searching for good deals, you find one that offers $9.00 for ingredients to make a pitcher good for ten cups. 

You’ve budgeted well. You only spent ninety percent of your earmarked investment. You’re confident you’ll sell all ten cups, and if you do, you’ll get your investment back, plus more. So you stand outside your lawn with a pitcher in one hand and a stack of cups in the other, asking neighbors to buy your lemonade.

No one buys.

After the day’s lemonade business operations, you lose $9.00, and you only have $1.00 left. In this case, if budgeting is the only thing you do, your lemonade business is over before it gets off the ground.

What Can Happen if You Learn Financial Management?

Let’s take a step back to the beginning of the lemonade business. This time, let’s apply financial management in the decision-making process.

Say you have a $2.50 budget, then relentlessly search for an even better deal that gives you the same amount of lemonade ingredients good for ten cups, which you’ll sell for a dollar each.

The other $2.50 you spend on leaflets to slide under the doors of your neighborhood.

Another $2.50 is loaned to another neighbor with a corndog business that promises a double return.

The remaining amount is stored in an interest-earning savings account.

With this financial arrangement, your business’s resources are well used. Even if you don’t sell on the first day, you still have at least two more chances to try again because you still have the other half of your initial investment. 

In addition, the $5.00 you’ve allocated for investing and saving have earned interest already. So you’re not completely at a loss if things go south. To see how this example plays out, read the next section.

The Purpose of Financial Management

By now, you should understand that financial management isn’t entirely about budgeting. If that’s not the case, what is financial management’s primary goal?

It’s profit maximization.

The goal of making the most out of the available financial resources is to ensure that each dollar is earning the highest amount possible. In corporate finance, this is measured by earnings per share (EPS).

Let’s go back to our lemonade business example once again. This time let’s add some numbers to prove a point and clarify certain assumptions.

  • The price per lemonade serving is $1.00.
  • Corn dog business investment promises a return of $5.00, including investment.
  • The savings account will return $2.60, including principal plus interest.
  • Through promotional materials, you are expected to sell all the lemonade in a single day.

Let’s break down the result of each financial decision using a simple income statement and balance sheet table.

Income StatementExample 1 (No financial management)Example 2 (With financial management)
Revenue(Sales, Investments, Interest)$0$12.60
Purchase Ingredients($9.00)($2.50)
Promotion($0.00)($2.50)
Profit / Loss($9.00)$7.60
Balance SheetExample 1 (No financial management)Example 2 (With financial management)
Cash + Revenue$1.00$7.60
Money to Investments$0.00$2.50
Money to Savings Account$0.00$2.50
Total Equity$1.00$12.60

In the first example, there was a loss of $9.00; only $1.00 is left from the initial investment. However, in the second example, not only was there a profit, the initial investment of $10.00 was retained, plus there was a gain of $2.60 from all the business (and finance) related activities.

By just making a few key decisions on the use of the resources, the financial manager was able to maximize their use to a point where it earned an additional $2.60.

Other Goals of Financial Management

Profit maximization is the purpose of financial management. But other goals will have to be fulfilled to increase the chances of getting your investment’s highest profit. Here are some of them.

Business Resilience

A startup is a fragile thing. It’s like a seed that needs proper nurturing and care to grow. Else, it will wither out.

To keep startups alive and thriving, a financial manager must make them resilient. Financially speaking, they have to make certain money decisions that account for short and long-term losses. Doing so enables the business to continue operating and fulfilling obligations even after taking a hit.

Financial managers and entrepreneurs make their businesses resilient by anticipating the worst that can happen and ensuring there are enough resources to go around until the business bounces back. You can do the same to improve your startup.

Capital Efficiency

The money you invest in a business venture may earn, but that doesn’t mean it’s being efficiently used (like in our lemonade example). A $2.60 gain on your $10.00 looks attractive, but what if you can get $5.20 on your $10.00?

Capital efficiency is all about making the best decisions. A financial manager pumps capital efficiency by always looking for better financial strategies and investment vehicles. Then, they invest their capital where it has the potential to get the most return with the least risk.

Debt Leverage

Savvy financial managers and entrepreneurs view debts differently. They don’t borrow because they need to, they borrow because it’s beneficial. As they apply for loans, they know how to use it to amplify their returns.

They do this by comparing loan payment terms to the potential gains the debt can give them. If the gains are better than what they have to pay for a loan, they jump in and take the opportunity. 

Doing this keeps the business’s assets and capital intact while allowing it to operate beyond its means to get an extraordinary return. In effect, the business is being lifted financially, just like being on a rising end of a lever.

Idle Resource Utilization

We’re using the term idle resources instead of idle funds to take the view of the entrepreneur. Financial management involves primarily recognizing idle funds—cash that is not earning anything—and using it for finance-related activities. At the very least, the intention is to retain its purchasing power.

On the other hand, entrepreneurs must practice financial management principles and not only for idle funds—they have to recognize idle resources, too. That means if there are assets that are no longer being used, they must be liquidated and invested as well.

Doing this will keep all the business’s financial resources actively working to keep its value, maximizing returns.

A Business Owner’s Role in Financial Management

As a business owner who’s a beginner in financial management, you’ll want to know how you can become better. In addition, you’ll want to know the basic tasks you can do as both an entrepreneur and a budding financial manager.

Whether or not you have a finance person on board, you’ll still be doing financial management tasks to stay on top of your business. So here’s the entrepreneur’s list of duties that crosses over to financial management.

Financial Goal Setting

For average business owners, there’s goal setting. But for those who know financial management, it’s always financial goal setting. That means you will measure your business’s goals based on their financial merits.

You’ll view goals based on profit maximization and demand more financial reports and data to make informed decisions.

Planning Budgets (And Sticking To Them)

Once you’ve set your business goals, it’s time to translate them into numbers. In most cases, you’ll do the budgeting if your business doesn’t have a finance professional. You’ll look at your data and create pro forma income statements with planned revenue and expenses. Afterward, you make sure that the real-life numbers match the ones you set or are close to it.

What do bookkeepers do is to help you generate these pro forma statements. In some cases, they can also perform the budget planning task on your behalf, so all you need to do is to ensure the business sticks to it as closely as possible. 

Sourcing Funding

Being the business owner, it is part of your duties to ensure you have sources for contingency funds. For example, when your business takes financial damage or goes through a surge in sales beyond your working capital, you’ll have to be prepared to infuse it with additional money.

So you’ll have to maintain sources of short-term and long-term business funding—that is, debt sources and investors willing to shell out. That way, your business will be financially resilient when the unexpected happens, and you will be financially prepared.

Managing Cash Flow

Part of making good financial decisions is knowing where and when to spend cash resources. There will come a time when you have a dilemma between paying a debt obligation and investing in your inventory to take advantage of a sale. Cash flow takes on a crucial role in that decision.

You’ll have to know what debts or investments you should tie your business in. Additionally, you’ll have to play around with debt payment periods and the degree of liquidity concerning a foreseeable business opportunity. This ensures you flow cash into the right places at the right time.

Fast-Track Becoming Your Own Financial Manager

Financial management is a powerful skill any business owner can acquire. But several problems arise when a business owner decides to acquire the skill. One of them is time.

You’re busy enough working 16 hours or more on your business. You can’t afford the time to get a finance degree. Luckily, there’s a practical way that fast-track learning financial management.

You don’t even have to enroll in a degree course. All you need is to work on your business and make an effort to develop your financial literacy. Here are some steps you can take in your day-to-day business activities to exercise that financial mind.

Get a Good Accounting Software

First, you need to get accounting software. Preferably cloud-based. Then, transfer all your business transaction data to that software. If you want to practice financial management, numbers are important, and if you’re going to learn how to read them, you’ll need them to be accessible.

Cloud-based accounting software such as QuickBooks Online (QBO) are helpful tools to digitize your financial data. Because it’s cloud-based, it allows you to access your business numbers anywhere there’s an internet connection and on any device in an organized manner.

Understand How Financial Statements Work

Accounting software can generate financial reports. There are three essential ones: income statement, balance sheet, and cash flow statement. Basic financial management is knowing how these three financial statements are interconnected to show the health of your business.

Go back to the section on What’s the Primary Goal of Financial Management? The table presented is an oversimplified version of an income statement and a balance sheet. If you’ll notice, the net profit of the income statement directly ties to the Cash + Asset section of the balance sheet. That’s only one of several relationships you’ll have to understand.

Learn How to Analyze Financial Statements

Once you understand that the three financial statements support each other, you’ll be set to learn analysis. At this point, you’ll have more or less an idea of how your business works through a financial lens. Now you’ll need to translate them by analyzing them.

You analyze your financial statements using formulas and ratios. Some common analyses you can do are income statement vertical and horizontal analysis, acid-tests, debt-to-equity ratios, liquidity ratios, and so on. Use your business statements and apply these ratios to analyze your performance.

Know Essential Finance Concepts

In finance, there are plenty of useful concepts you can learn. But you can strip it all down into two important fundamentals.

Time value of money – In a nutshell, this concept states that money in your hands now is worth more than the money you’ll have in your hands at a future date.

Compound interest – This means your money’s interest earnings (or expenses) grow significantly over time. So the longer you keep it there, the faster and bigger the earnings (or payments) will be.

Learn Cash Flow Management

You’ll have to learn how to balance your cash inflows and outflows as a business owner. But more importantly, you’ll also need to manage where the cash goes and if it is getting the most benefit where it’s going.

You’ll have three main activities in business: day-to-day business operations, debt and financing, and investment activities. Every day, you’ll have to juggle cash assets within these areas. A good practice to follow is keeping your debt and financing activities at a low level unless you’re positioning for leverage.

As for operating activities, the main goal is to keep them unhampered. Purchases and payments should flow as smoothly as possible. For investments, pick the relatively liquid ones with low to moderate risk and a good return.

Get a Team of Accounting Professionals

The best way to fast-track your financial management learning is to get a team of accounting professionals doing your numbers. They know finance concepts and are skilled in producing the numbers you need for financial decision-making.

Having them on the team will be like having an on-call mentor whom you can consult about financial management. And if you have a personal financial advisor, your learning will be faster.

Doing Finance Management Is Possible Because of Accounting Professionals

Financial management depends on numbers. That’s why accounting is often confused with finance and vice-versa because the two are entangled.

But accounting is the discipline of making your business’s performance tangible. Without it, financial managers won’t be able to analyze and make decisions for profit maximization. That’s why business owners must establish a good accounting system first to truly practice good financial management.

If you’re ready to take the step of learning financial management, consider accounting for your business and get yourself a team of competent accounting professionals today.

AUTHOR’S BIO:

Mike Pignatelli, CPA, is the CEO of Unloop Accounting, an agency built to meet the accounting needs of modern ecommerce businesses. As an experienced financial controller, Mike has worked with various seven-figure inventory businesses. Mike and his team are your go-to accountants if you need reliable data to make sound financial decisions.

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