The concept of financial management is simple, but of fundamental importance for managers to understand how their investments work and, mainly, how to apply them efficiently.
It aims to keep your business competitive with efficient management of resources to maximize utilization and, consequently, results.
The concept, therefore, becomes practical as a tool or technique, used precisely to effectively control the company’s finances, whether in relation to the granting of credit to customers, investment analysis, financial planning or inventory control, boosting the business.
Thus, good management studies viable ways to obtain resources, avoid unnecessary expenses and always think of the best way to conduct resources. For this reason, all aspects of a company are directly linked to responsible and well-planned financial management.
Throughout this text, we will present some ways for you to carry out the financial administration of your company, in addition to 5 basic concepts to be put into practice. Good reading!
Perform financial planning
Financial planning is one of the most important activities when it comes to managing finances, as it guides all of your company’s actions.
Check below some key topics involving this planning.
Make a projection of income and expenses
The first step to start your business financial planning is to analyze the entire transaction history of recent cash inflows and outflows, making it possible to project expenses and income in cash flow. Also gather all the documents and records that can help in the data collection.
Even though it’s something simple, many entrepreneurs do not keep a complete record of all their expenses and income, and this oversight generates a distorted and erroneous result of the business’s finances, making it difficult to identify possible problems. One solution here is to use spreadsheets and control and management software, and write down everything that comes in and out of your cashier.
Once you have control of your flow, you will be able to clearly identify where most of your expenses come from. Thus, cutting excess becomes much more practical.
Knowing your company and your product is essential to be able to plan, project your billing, create goals and target investments. Try to analyze factors such as market time, your target audience, suppliers, keep your customer base updated and understand your billing. It is interesting, here, to use methodologies that help to understand the operation of your company, such as, for example, the SWOT analysis, which defines strengths, opportunities, weaknesses and threats.
Make predictions with different scenarios
Forecasting scenarios is thinking, in advance, about what to do if your goals are not achieved, and that makes all the difference in your planning. Create an optimistic scenario, with ambitious goals, another realistic one, with more possible goals, and, finally, a pessimistic scenario, thinking about a possible solution if your performance is affected, thus avoiding being caught by surprise.
Set goals and objectives for the future
After completing the entire process of internal study of the company, such as projecting scenarios, cutting costs in the budget and having control of all your financial transactions, it will be time to analyze where your company can reach. Thus, some topics are quite relevant to study and understand:
– What are your business objectives within a given period?
– What actions will be taken?
– Which employees will be responsible for each task/area?
– How long will the actions take until the first results appear?
measure the results
It is necessary to make it clear that carrying out all the previous steps, leaving everything on paper will not bring the expected success: measuring results is what will effectively open the horizons for the health of your company. Therefore, strictly monitor the results.
5 Basic Concepts of Financial Management
For a better understanding of the process, check out five key concepts below, especially important for beginners:
1. Inventory control
It is quite common to note the difficulty of newer companies in inventory management, not having an adequate amount to meet customer needs – or the opposite: keeping too large an inventory for their level of operation.
This should be the first step in financial management, as it will ensure that it is not scarce or excessive, thus bringing balance in relation to other resources, and can be done through the ABC curve, which lists, in ascending or descending order, products with more or less output.
The main reason why good inventory control is included in financial management is the fact that it keeps the cash flow more dynamic, also making it possible to schedule purchases and sales. In addition, it makes it possible to plan the best way to guarantee a stock even in adverse situations, such as, for example, suppliers delay the distribution of products, avoiding the lack of one or more of them, especially when your business starts to take off.
2. Bank reconciliation
Bank reconciliations are the bills your company has to pay and receive: they determine whether your resources will bring profit in the coming months or if they will fall short of the estimate. Therefore, it is important to maintain a cash flow, making sure you are sure which resources will arrive or leave, when and how.
One of the most important factors when opening your business is having a strategic and detailed financial plan, thus avoiding any surprises. This is what we call financial health: being prepared for when unforeseen events arise – between us, those who undertake know that they often arise.
3. Definition of costs and prices
It is extremely important for financial management that the definition of costs and prices is based on the principles of financial management, after all, there is no point in having all the other sectors of the company in excellent working order if the price of goods is higher than expected or established on a erroneous.
Even if sales have a good volume, a price below the average can generate losses, in the same way that an overpriced cost can cause a drop in product output and, consequently, loss of market.
Thus, a good way to maintain organization and good pricing is to have a cost spreadsheet, where flexible and variable costs must be entered, with the addition of the desired profit margin. As an example, it can be said that price = costs + expenses + profit. Thus, the established value will be the one that meets your company’s objectives and, based on that, make comparisons with the competition.
4. Control over profit
Technically, this topic is about correcting profit. In practice, it means adapting financial planning to the profits made. Example: if a certain goal is not achieved, it is necessary to make adjustments in the course of investments, costs, expenses or merchandise portfolio. Thus, when the desired profit is achieved, the company needs to pay attention to repeating and expanding that profit. This strategy, of course, should be included in financial planning.
5. Allocation of net income
In order to properly manage the destination of the net profit, it is necessary to relate areas of investment, financing and use of the company’s net profit. As it is a source of funds for the organization, it is essential to determine how much of it will be retained and what its purposes will be.
One of the commonly used destinations are in financing and investment decisions. For financial management, it is extremely important to remember that, in relation to investments, there is a return that must be achieved. Thinking in this way, using profits to finance investments, for example, can only be a possibility when the alternative of investing promises a higher return than the owners would get if they applied the resources to themselves.
The key, therefore, is to analyze these issues coldly and always keep in tune with the company’s financial priorities.
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