What could happen to a business if it doesn’t take its responsibilities towards financial management seriously? Instead of burying your head in the sand and hoping for the best, CFOs should consider the implications of financial mismanagement and demonstrate to the C-Suite how far-reaching they can be. Without proper oversight of cash flow for example, businesses can go into a slow decline and if left unchecked, can go beyond recovery.
If you want your business to be successful, profitable and in it for the long haul, you must have a clear understanding of your business’s finances. This includes choosing the right metrics to build out your financial reports to make accurate day-to-day business decisions so you can steer the ship of the business in the right direction.
What is financial management?
Financial management is the process of directing, organising, and controlling commercial activities such as the acquisition of revenue from the business, the application of financial principles to the firm's assets and areas relating to revenue management.
The management of a business’s financial resources also encompasses financial decisions related to raising money from various sources; the cost of financing projects; and the potential returns achieved during the process. In addition, it provides the C-Suite with an accurate picture of how to proceed with investment decisions on fixed and current assets, in addition to working capital decisions.
Benefits of good financial management
An efficient financial management system in the Cloud increases visibility throughout the organisation and encourages understanding of the numbers at all levels. This in turn leads to investor confidence. Investors often want assurances regarding the security of their investments. A successful financial management process ensures both risk reduction and profit maximisation.
Having access to real-time financial information in the Cloud as a single source of truth also facilitates better decision-making when the relevant facts are accessible. Bottom line, good financial management makes it easier to determine solutions based on the circumstances of the situation.
How choosing Cloud tech can improve financial management
CFOs today have a central part to play in a future where businesses are becoming more dependent on extracting value from the immense amount of data that’s generated. Starting with the finance team, they have a critical role in the digitalisation of the business and to re-evaluate and refine financial management processes.
One of the most important elements of long-term business success is managing company finances. With Cloud accounting software, finance teams can automate processes to effectively manage and accurately collate reports using financial data in real-time on key business areas such as accounts payable, accounts receivable, payroll and more.
How can Cloud accounting software improve financial management?
Improved workplace productivity
Advanced’s Annual Business Trends 2021/22 survey found that the most important attribute for a business leader today was to ensure that staff have the tools to be productive at work. One of the biggest benefits of financial management applications accessed through Cloud accounting software is how it grows efficiencies. It makes daily routines faster through the automation of manual processes by reducing mistakes usually made through human error via Excel. This means that the finance function can make more accurate decisions in a timely manner and channel their focus into higher value projects such as scenario planning by leveraging the data readily available to them in the Cloud.
Finances are one of the last places a business would want to make mistakes. From tax errors to payroll errors, financial discrepancies can have a disastrous effect on a business when it comes to decision-making or looking at different areas to invest in. Using a Cloud accounting software system helps to automate parts of the finance process that substantially reduce errors. This helps businesses optimise their cash flow and better plan daily, weekly, monthly, and yearly operations. In addition to reducing financial errors, the software can organise records for better budgeting, planning, and forecasting as well as help to categorise expense management. This reduces the likelihood of inaccurate auditing and reduces business liabilities.
Upgraded planning and strategy
It’s not enough to know what your current financial standing is – this information, along with projected revenue, assets, liabilities, and more all help CFOs, finance teams and the C-Suite plan for the months and years ahead. Cloud accounting software supports financial analysis to help finance teams forecast, assess scenarios, and analyse market data and trends which can lead to more informed planning and decisions further down the line.
Data and financial transparency
Financial management tools in the Cloud help you understand how all your departments work together to impact your overall financial health. It eliminates guessing and estimates and gives CFOs and the C-Suite accurate data in real-time to increase clarity about business operations and overall reduce financial complexity. This also helps to reduce fraud. Because Cloud accounting software helps give greater transparency and more accurate reporting about expenses, there is less likelihood of fraud. It can also be a way to prevent financial losses, theft, and mismanaging funds.
Ability to measure growth
Implementing a Cloud accounting software solution gives finance teams insight into their growth across markets and products as the company expands and ages. Good financial management software will have built-in analytics and reporting that CFOs and finance professionals can use to measure growth.
Stay on top of compliance
Tax codes and accounting standards such as Making Tax Digital are subject to change – Cloud accounting software helps to account for these changes and prevent mistakes due to updates. Financial management tools in the Cloud can automatically update and provide finance teams with the latest requirements to follow all rules set by national and international accounting standards without missing any critical updates. In addition to staying legally compliant with finance laws, businesses will also be able to immediately see how changes will impact their organisation. One of the additional benefits of Cloud accounting software is that it helps the finance function be flexible and efficient in their financial dealings without inhibiting growth.
The consequences of poor financial management in business
We all tend to put off doing something until something goes wrong before taking action. But this is not an option for finance departments.
During the past two years, CFOs have become accustomed to facing unexpected challenges. Managing business finances throughout the pandemic put a spotlight on the importance of forecasting and planning for such situations before they happen.
It was also important to keep tabs on business partners, whose performance or financial health might have affected company finances. This led to planning for worst-case scenarios to evaluate how resilient their business would be if a customer failed to pay, or if a supplier failed to deliver.
The bottom line is that financial mismanagement harms all types of businesses. It doesn’t matter whether that said business has been well-established for 20 years or is an aspiring start-up. A business' finances should be managed accurately. Otherwise, it is just like chess, where one wrong move could mean game over.
Poor financial management can have the following consequences
You could run out of money
Financial management involves monitoring cash flow to ensure your business has enough money to meet its financial obligations. Failure to manage cash flow is one of the biggest reasons for business failure. Poor cash flow management strategies and failing to plan are one of the biggest financial mismanagement business risks. The past two years have seen businesses such as Airbnb lose out on profits, or sink because they failed to develop a solid cash flow plan.
One wrong decision away from going out of business
If you manage the finance function within a business without knowing its financial state, you are essentially driving blind. Unless you have current, accurate financial information, no matter what decision you make, you won't know if it's the right one, and if it's the wrong one, it could impact cash flow, result in layoffs, and in some cases, mean going out of business.
There won't be a way to identify if your business is profitable
It is impossible to know if your offers are profitable if you are not tracking your revenue and expenses. That puts you in dangerous territory. In business, your primary goal is to make money, so if you are losing money on your operations, your business won't last.
Unable to manage your expenses
Excessive expenses are quite often what destroy profitability. Identifying your overspending can help you adjust. If you know that money leaks are occurring in your business, you can plug them. Knowing how sales volume and expenses affect your bottom line, also known as your profit line, will allow you to adjust so that your business is profitable.
Your business won't qualify for a loan
Any investor or bank considering investing in or loaning money to your company will require you to provide financial statements. If your business does not have accurate financial statements, which are impossible to create without reliable bookkeeping records, you will not obtain the cash infusion that the business is looking for.
How to identify poor financial management in business
Not realising the importance of good financial management from day one
In many cases, businesses only discover the consequences of poor financial management after it is too late. By taking financial management seriously from day one, you can prevent business-threatening issues such as poor investment decisions before they become major, irreversible problems.
A lack of a clear financial plan
From the outset, set up a clear financial plan to help keep your finances on track so that your money is spent where it's most needed to boost profits and give you the best return on your investments. A clear financial plan will help you avoid making the common mistake of getting too sucked into day-to-day business tasks and forgetting to step back and look at the bigger picture. As a starting point, a simple financial plan includes detailed cash flow forecasts which will help you to always know where you stand, plan for the future, and drive your business forward.
Difficulty understanding your business's cash flow
The cash flow of a business is crucial to its success, but many finance professionals fail to realise its significance over time. Poor cash flow management can completely cripple your business, which means that you will not have the funds to grow it, so you need to put in strict procedures to manage it. Invoicing customers too slowly is one of the most common mistakes businesses make - and something as simple as accelerating that process can dramatically improve cash flow and performance. When a business does not have formal records and processes in place, it is hard to know when somebody has not paid an invoice or whether the business owes money.
Financial data not being understood or leveraged
Using financial data correctly is the key to good financial management. Whatever your industry, keeping a close eye on financial data in real-time enables you to innovate, compete and increase your organisation's profitability.
By maximising data use, you can transform it into a valuable asset that leaves your competition in the dust. To lead with data, you need to take advantage of technologies such as predictive analytics, artificial intelligence, automation of previously manual processes such as reporting based on spreadsheet figures, and machine learning.
Updating your existing software
Today, the CFO plays a central role for businesses as they rely more on leveraging enormous amounts of data to create value. In the finance function you have an essential role in the digital transformation of the business. Developing your data capabilities will help you make the right decisions about what cloud technology to invest in based on the economic value of the information you're handling.
When it comes to practising good financial management, connecting the adoption of Cloud accounting software with business value is the most effective way to advocate for digital transformation and elevate the role of your finance team.
Achieve exceptional financial management with Advanced Financials
Without effective financial management processes in place, your business will fail. If you want your business to succeed in the long run, you and your finance department need to identify and understand your financial data in real-time.
Advanced Financials is a robust Cloud accounting software system which allows businesses to realign their data and develop more accurate forecasting and management capabilities.
Finance functions can utilise financial management processes in the Cloud to streamline everything from keeping the C-Suite informed about cash flow trends to automating previously manual processes while ensuring that all areas of finance are taken care of.
Streamline your financial management processes with rich, intuitive functionality from Advanced Financials
- Robust functionality - The core of Advanced Financials is powered by robust accounting and financial management functionality which enables finance teams to accurately manage all elements of accounting from a flexible general ledger, accounts payable, credit management, bank reconciliation and more.
- Accounts payable and receivable - Track income and expenses to monitor cash flow and ensure payments.
- Sales invoicing - Easily summarise outstanding purchase orders with regularly updated commitment reporting and ensure cash flow is continuous by matching goods receipts to purchase orders easily and efficiently.
- Credit management - Reduce credit risk by managing all aspects of the credit management lifecycle and as you focus activities appropriately, see exactly where your aged debt is.
- Bank reconciliation - Import bank statements which will automatically match transactions, meaning you always have an up-to-date view of your cash position across multiple bank accounts.
By setting the tone for your financial management processes in the Cloud, you can ensure smoother operations in the future and the possibility of scaling up your business even further. Get in touch with one of our experts today.