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Business Financial Management—Why Is It so Important?

Business financial management happens to be one of the essential roles undertaken by proprietors and business managers. It helps them consider the implications that their decisions will have on the cash flow, profits, and financial viability of the business. All activities undertaken in the company will have an impact on how the company performs financially, and will need to be controlled, and evaluated by the owners.

The Business Life Cycle

people doing their workIt is common for startups to experience negative cash flows and losses during the initial days. This is where business financial management comes in. It is upon the managers to ensure that the cash on hand is enough to pay the suppliers and the company employees. This being despite the fact that the money going out during this period is likely to be more than what the business is bringing in.

The managers will, therefore, need to make financial projections based on the negative cash flows to help them determine the total amount of money that will be required to keep the business afloat until it starts to make a profit. As the company begins to mature and grow, it will need additional cash to finance its expansion.

Budgeting and planning for these financial needs will be essential. The financial managers have to decide on whether to fund their expansions by relying on internal cash, or by borrowing money from other lenders. As such, the sole purpose of financial management in a business will be to locate cheap funding sources, control the business’s capital costs, and ensure that the business balance sheet does not become too leveraged on external debt. The latter can negatively affect its credit rating.

Operations

In the course of carrying out its day-to-day operations, the company will either be providing a service or a product. This means that it will need to make a sale, collect money from the sale, and then start this process all over again. What this means is that the turnover ratio of finished goods and raw materials has to be managed, customer sales and receivables have to be done on a timely basis, and the process has to start again by acquiring new raw materials.

While all this is happening, the business will need to pay its employees, suppliers, and take care of its operating costs. These are all tasks that will require the business to have access to cash. For this to happen, the managers will need to have astute financial management skills.

Additionally, it is essential to consider the fact that although economies have long-standing histories of taking an upward trajectory, there are instances when they will undergo a sharp decline. The business owners and managers will need to plan for such times and ensure that they have enough liquidity to help them weather such times. If this does not happen, they may end-up folding their operations for lack of adequate cash.

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The Takeaway

Business financial management is an essential skill that all owners must possess. Any decision made by the owner or the manager will impact the company’s financial position in one way or another. As such, the person in charge of the company has to ensure that any decision made fits well with the company’s current and plans.