The what and why of financial management

There are many statistics thrown around as to the failure rates of small and medium enterprises (SME’s) but whatever the actual percentage or number, entrepreneurs and business owners don’t expect to become a statistic.  Failure is what happens to other people – who don’t have a solid business plan and good ongoing financial management.

Financial management is recording the business performance (i.e. bookkeeping) and doing something with that data. Every business in Australia does this but the ‘something’ ranges widely and has a huge effect on the success and longevity of that business.

I have broken down into a number of broad categories the various levels of financial management – at least one of which will apply to every legitimate business in Australia.

Tax and compliance

The basic legal minimum of financial management is the requirement to maintain adequate financial records in order to prepare and support a tax return (whether income or company tax, BAS or FBT return). Depending on the type and size of business there may be compliance requirements for other reasons (e.g. Work Cover, State Revenue, ASIC or APRA). This minimum can range from giving a shoebox of receipts to your accountant up to a complete and consistent accounting system.

For some small businesses this may be sufficient. However it means your accounting system is for other parties and you are gaining little for yourself. How does your business productivity and efficiency stack up against previous performance, expectations or other similar businesses? If your plans and goals are to improve and grow the business how will you go about it?

Management Reporting

This is an extension to the above with the focus being more on the business operations and performance rather than just reporting on results. It is as much (or more) for internal management as for third parties such as investors or banks who may only need or want to see selected information that is suitable for their purposes. Management reporting with insightful commentary and analysis is an essential tool for a dynamic and successful business (or one that wants to be).

The frequency of reporting should allow you to see current and up-to-date information so you can change and react to conditions as early as possible while being practical and fitting in with operation of the business. This can range from weekly (or even daily) in the case of sales (or other selected areas such as payroll) to monthly (or quarterly at most) in reporting on the business as a whole.

Forecasting

Taking financial management to the next level, good reports and records can be extrapolated into the future, taking into account expected growth and other foreseen changes.  This will show a picture or roadmap of where the business is headed and the process will also encompass how to get there – this should show what and when additional resources are needed (such as capital, assets or staff) or indeed when or even whether the business can achieve it’s goals.

Business Plan

A good plan is not just done when a business is set-up and then filed in a drawer. It should be a living document to be regularly revisited and revised to reflect changing conditions, goals and performance. Even if things don’t change significantly, going through the planning process may prompt you to address issues (or even new opportunities) that you may not have otherwise done.

There is a multitude of templates and information available on business planning. All are useful but the main questions your plan should address are:

·      Who? This is a description of your business

·      What? What do you do or want to do?

·      Why? Why are you in this market and why would you be successful? What is your niche or unique selling proposition (USP) and how do you stack up against the competition?

·      How? How are you going to run your business and market your product or service?

·      How much? Are the financials consistent with the words of the plan? Is the bottom line an acceptable and supportable outcome? If not the rest of the plan may be redundant?  [I actually often suggest doing draft financials first to see if you’re even in the ballpark]

A by-product of good regular ongoing financial management is that your annual tax return will become more of a formality – which will save your tax accountant time and save your business money! You can do it all yourself  (it’s not rocket science!) or outsource to a professional (what is the best use of your limited time?).

Do you want your accounting to work for you (not just the ATO)? Do you want to maximise your chance of not becoming a business failure statistic?

So what level of financial management is best for your business? The more the better is not always the case – as with most things what counts is quality, not quantity.