10 Keys to Success for : Financial Management

1. Managing your cash

"Cash is King" is one of the cornerstone sayings of business, and it is important to do everything in your power to ensure that your enterprise has good cash flow. Cash is the lifeblood of your business. Your business runs much smoother if you do not have to keep a nervous eye on your bank balance. The negative consequences of a cash flow crunch can be quite severe: you may not be able to get the supplies you need to serve your customers, you may have to borrow money at excessive interest rates, you may cause legal issues by missing tax payments, and you may even not have enough cash for your payroll.

Relationships will suffer both inside and outside the company, especially if you miss a payroll. The business owner usually suffers above all others, as it is their compensation that gets cut first, and most. The bottom line: when you run out of cash, you may be run out of business. Get the funding you need, before you need it, to avoid that problem.

2. Running your company "by the numbers"

Managers should regularly create expense budgets and revenue forecasts, and review company progress against those plans. There should be no doubt about the current financial position, planned income and expenses, and funding requirements. Your budget is your financial plan. It is a good practice to develop your budgets on an annual basis, and then to compare them with your actual results each month.

You are certain to have variations between your budgets and your "actuals", and you should analyze those variations to determine if they are random, significant, the result of a posting error, or the result of an unauthorized expenditure. Whenever you find a variation, you should also look at your year-to-date results to see if the difference is made less significant by counter-balancing variations in other months, or if there is a trend that requires some action.

3. Concentrate on crucial figures

It is easy to get sidetracked into the minor details that do not matter as much as the big ones. When managing the finances of a corporation, you must pay utmost attention towards the issues which are likely to comprise 90 percent of the spending budget. Typically, these would incorporate income from sales or services, salaries of employees, and non-salary costs like supplies. Its important to understand the impact of every single of these numbers so it is possible to keep track of the finances of the firm. Always check monetary statements to help keep yourself informed.

4. Master the Metric System

Every business should track daily, weekly, and monthly metrics -receivables, payables, gross and net margins, sales, average sale, inventory. Enlightened entrepreneurs also insist on real-time measurements unique to their industry.

Numbers tell the story, but don’t obsess too much about them. Entrepreneurs often succumb to analysis paralysis by studying too much -or the wrong- information. They whip out all sorts of spreadsheets but can’t tell you their margins by customer and product. Ask youself, If I could have only eight pieces of company information every day, what would they be and why ?

5. Managing Receivables

Financial statements may lead you to believe that you’re raking it in, but next thing you konw you can’t meet payroll. The three biggest culprits are overdue receivables, slow-turning inventory, and growing too fast.

Get strict with past-due accounts. Not only do you have to get paid you have yo get paid on time.
Contact the customer as soon as your protocol permits. Wait untill an account is ninety days past due and you may be too late. Do all future business C.O.D. (Cash on Delivery) until the customer is current again. No exceptions, no matter who the customer is or how long you’ve had a relationship. Get lax and the account may snowball out of control. Then there will be two companies in trouble.

6. Managing and funding growth

Businesses are like sharks-their survival hinges on forward progress. Sometimes that means adding new stores, plants, or regional offices. In other businesses, it means selling more widgets to existing customers, creating new products, or raising same-store sales.

Avoid the oxymoronic death-by-growth nightmare by doing sound due dilligence. Before adding all the ingredients-people, equipment, inventory, real estate-prepare revenue and expense projections to determine whether your plans are affordable. Sophisticated businesses and private equity pros run the numbers through capital investment formulas based on discounted cash flow (DCF) and targeted internal rates of return (IRR). These calculations answer two basic questions:

1. How soon will the investment break even, so you can pay shareholders ?
2. What will be the return on investment ?

Nailing down these numbers takes a lot of the risk (but not all) out of the investment’s "go/no go" call.

7. Build an emergency fund

One of the best tips for beginners is to build an emergency fund. Experts recommend anywhere from 1 month to 6 months of your expenses. It really depends on your personal situation. Don’t be intimidated by the amount, just start saving, realize it may be a distant goal, and keep going and you will get there!! It is a very comforting feeling, knowing that if the car breaks down or the water heater breaks that you have money in reserve waiting for it.

8. Spending less

This is a vital lesson that everyone must learn, and unfortunately, it is a hard one. While most of us get the point that you have to spend less than you earn if you want to stay in the black, that concept tends to fly right out the window when faced with every day life. The prevalence of credit cards, easy payment plans and a lack of knowledge about bad debt has led many into spending much more than they make.

One of the best ways to start spending less is simply to monitor exactly what you spend, keep a log and determine where you can cut expenses. A budget is a vital tool that will help you learn more about the money that goes out the door each month and how much comes in. By working with a budget, you can start to tip the scales in favor of how much is coming in.

You can always find more fat to trim, no matter how lean you are. Sit down with your management team and slog through the expense portion of your profit-and-loss statement. Line by line, ask two questions:
Does this add value to the customer expierence ? If so, can it be recovered through product or service pricing ?
If the answers are no, eighty-six it.

9. Avoiding bad debt

This is a major problem for millions of people and it is only getting worse. It is vital to recognize that there are two main forms of debt – good and bad. If you have gotten into a bad debt trap, getting out is extremely difficult. Remember, bad debt is something that drains your finances, good debt is something that adds to it. Reduce your amount of bad debt, increase your amount of good debt and watch your finances turn around.

Bond with your banker. Your bank is a partner, not an adversary. Get your banker on board by communicating early and often. Habitually review your monthtly financials together-bankers love when you consider them as an extension of your management team. Be especially forthcoming with bad news. It’s human nature-nobody likes to tell the banker when there’s a significant negative variance between projected and actual income.

Some execs roll up their sleeves and quietly try to turn the situation around. A month goes by. Two months. Things get worse, and more and more of the loan covenants are blown. Sheepishly, they call their banker, who’s none too happy to be the last to know. You’re better off coming clean up front.

10. Saving More

No matter how much money you make, saving part of it is very important. Whether it is a simple emergency fund that can help you get through bad times, or a fund for retirement, saving is essential. If you find it difficult to have any extra money each month for savings, it is time to investigate how you can change that.

Whether you need to find a better job that pays more, manage your finances better, or find ways to create more than one stream of income, there are many ways that you can start saving more money.