Business and the importance of Finance

To manage a successful business cash is the life-blood it needs if it wants to keep operating and there are so many instances of companies failing because they ran out of cash.

Some of the many reasons I hear of failures due to cash shortfalls have been: Bills to pay and no cash to pay them. I have an unsympathetic bank and more excuses which simply tell me that there was a systematic failure of simple money management.

I have also seen many businesses which are in a rapid growth phase and are attempting to fund the growth out of normal cash flow. This becomes an impossible task unless the profit margins are so obscene that you are actually placing the integrity of the operation at risk as sustainability under these operating conditions is highly unlikely.

Financial controls are so important to the success of a business that a manager/owner should know exactly where the finances are every day. I call this knowledge the ‘Vital Signs’ of the business which covers all aspects of operations which make up strategic, sustainable growth and profitability.

There are some basic ‘Vital Signs’ which will determine the health of the business in a financial sense:

  • Sales
  • P&L
  • Contribution % per product and/or process
  • Net asset position of balance sheet
  • Liquidity

There must also be a disciplined approach to the source and application of funds. Investment in plant, equipment, personnel, promotion etc must be justified on a ‘Return on Investment’ basis where the pay back was swift and positive.

Utilization of assets both physical and equipment wise is paramount for positive cash flow. The most valuable asset a business can deploy is the human resource of rich and talented personnel who show experience and dedication at every level of the organisation.

In reality and in any business the financial territory is dominated by 3 major control features:

  1. Balance Sheet – Provides your overall financial position
  2. Profit & Loss – Provides your overall financial performance
  3. Source and Application of Funds – Provides your Liquidity/Cash-flow measurement

I read a great saying some years ago now which resonated strongly with me and in particular business management.

‘There are only 2 problems in Life:

  1. Deciding what to do
  2. Doing it

What a philosophy to work with and be guided by as it captures the essential requirements for effective management of your financial landscape. From this, objectives can be established whereby personnel can monitor and control progress towards the overall objectives.

In other words, there will be no surprises relative to income and expenditure which may form the basis of an embarrassing  dilemma.

Although the products and processes of businesses may differ, the principles of sound financial management are all the same. The method by which company objectives are determined will invariably be determined by the political environment of the business, however they will all translate into the strategic intent:

  • What, in financial terms does the business want do and achieve?
  • How will the business provide the funds to meet the strategic intent?

All business owners seek to grow in profit and value of their asset which make them marketable commodities.

But the business must show sustainable results in growth and profit along with innovative product and process development.

Remembering at all times that the employees are the most valuable asset and the best marketers of the business.

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