All About Financial Management in Business
© Copyright Carter
McNamara, MBA, PhD
Applies to for-profits unless otherwise noted.
New business leaders and managers have to develop at least basic skills in financial management. Expecting others in the organization to manage finances is clearly asking for trouble. Basic skills in financial management start in the critical areas of cash management and bookkeeping, which should be done according to certain financial controls to ensure integrity in the bookkeeping process. New leaders and managers should soon go on to learn how to generate financial statements (from bookkeeping journals) and analyze those statements to really understand the financial condition of the business. Financial analysis shows the "reality" of the situation of a business -- seen as such, financial management is one of the most important practices in management. This topic will help you understand basic practices in financial management, and build the basic systems and practices needed in a healthy business.
Sections in This Topic Include
Basics and Getting Started
Basics of Financial Management
- - - Role of Treasurer and Board Finance Committee
(if yours is a corporation)
- - - Getting an Accountant or Bookkeeper, If Needed
- - - Buy Accounting Software to Help You?
- - - Getting a Bank and Banker
- - - Basic Overview of For-Profit Financial Management
Understanding Bookkeeping and Accounting
- - - Bookkeeping Basics
- - - Addressing Financial Controls and Risk Management
Activities in the Yearly Accounting Cycle
Planning and Cash Management
Financial Planning
Budgeting and Managing a Budget
Managing Cash Flow
Credit and Collections
Budget Deviation Analysis
Financial Statements, Analysis and Reporting
Financial Statements
- - - Profit and Loss Statement (Income Statement)
- - - Balance Sheet
Financial Analysis
- - - Profit Analysis
- - - Break-Even Analysis
- - - Ratios
Evaluating Your Financial Practices
Evaluating Your Financial Management Practices
Special Topics
Financing Major Purchases
Cost Cutting
Boards and Understanding Financials
General Resources
Various Types of Financial Resources
Also consider
Related Library Topics
BASICS AND GETTING STARTED
Basics of Financial Management
Role of Treasurer and Board Finance Committee
If your small business is a corporation, you would do well
to find someone experienced in financial management and encourage
them to be your board treasurer (your board chair has this responsibility
to find someone suitable, as well). Therefore, it's important
to understand the role of the board treasurer.
Role of Treasurer (for club, board, etc.)
Board
Finance Committee
Getting an Accountant or Bookkeeper, If Needed
If you are inexperienced in financial management, then you
should get an accountant initially to help you set up your bookkeeping
system, generate financial statements and do some basic financial
analysis. But don't count on an accountant to completely take
over your responsibility for financial management! The accountant
can help you set up a bookkeeping system, generate financial statements
and analyze them, but you have to understand financial data to
the extent that you can understand the effects of your management
decisions, the current condition of your business and how decisions
will effect the financial condition of your business in the future.
How
to Hire an Accountant
What
to Look for When Hiring an Accountant
You should carefully consider whether you should hire an outside
accountant, or hire your own employee. The IRS pays increasing
attention to the hiring of independent contractors.
Hiring Consultants
The following link might help you when you establish a contract
with an accountant.
Business
Contracts (this will be useful if you sign any contracts with
the accountant)
Also consider
Various Types of Resources
Buy Accounting Software to Help You?
Strongly consider getting a software package to manage your
books! There are a number of very useful software packages that
will help you automate bookkeeping, generation of financial statement
and their analysis. Note that an accounting software package can
greatly reduce the time to enter and manage accounting transactions,
and generate financial statements. However, you still should have
at least a basic understanding of the accounting process for your
organization, including what journals are used and what general
accounts exist. You must have good understanding of financial
statements and how to analyze them -- an accounting package cannot
do this for you!
Accounting Software (this link is
to "Software for Small Computer Systems")
What Type of Bookkeeping System Should you use?
How to Automate Payroll
Getting a Bank and Banker
You'll need to start a business account at a bank. Probably
the best way to find a good bank is to ask for advice and references
from other small businesses, especially those that are of the
size and nature of yours. If you're just starting out, you probably
don't have much money. You may be able to get buy with a non-interest-bearing
checking out that has no, or minimal, fees. The following links
may be useful
Getting and Using a Banker
Also consider
Various Types of Resources
Basic Overview of For-Profit Financial Management
To get an overall sense for the recurring financial activities
in the typical, read the following articles. (You'll soon get
more basic information below in the section titled "Bookkeeping
Basics".)
Basics
of Financial Management in U.S. Small For-Profit Businesses
Financial
Management Training Center
Basic
Accounting Lesson Plans and Worksheets
Other sites that you might benefit from are:
Bookkeeping 101: A Beginning Tutorial
Online Learning Center's tutorial
Financial Accounting for Owners, Managers, and
Administrators
Free Introductory Accounting & Bookkeeping
Tutorial
Business
Plan : Finances of a Small Business
Understanding Bookkeeping and Accounting
Basics financial managements starts with good record keeping. Be sure that you've read the above-mentioned article Basics of Financial Management in U.S. Small For-Profit Businesses before you continue reading the links listed below.
If You Want to Learn All About Bookkeeping and Accounting, Start Here
These sites provide an online tutorial about the basics of
bookkeeping and accounting. Don't worry about thoroughly understanding
very term and process. But do think about what you're reading
in order to get a strong "feel" about the process of
accounting.
Basic Guide to Financial Statements
Bookkeeping 101 (tutorial)
Introduction to Bookkeeping
Introduction to Accountancy
Classification of Accounts (for Chart of Accounts)
In accounting, different types of financial transactions (eg,
paying telephone bills, copier bills, getting money from sales,
getting money from interest income, etc.) are assigned specific
numbers (account numbers) which help to record and track those
types of transactions. Businesses might create their own list
(or chart) of accounts or adopt a chart used by other organizations.
In any case, you should have some basic impression of a chart
of accounts. The following links will help you.
Setting Up a Chart of Accounts
Develop the Chart of Accounts for your Small Business
Chart of Accounts Definitions
Addressing Financial Controls and Risk Management
Financial controls exist to help ensure that financial transactions
are recorded and maintained accurately, and that personnel don't
unintentionally (or intentionally) corrupt the financial management
system. Controls range from very basic (eg, using a checkbook
and cash register tapes to more complex, eg, yearly financial
audits).
Internal Financial Controls for a Small Business
Top 20 Financial Controls to Protect Your Company from Fraud, Theft and Embezzlement
Fraud Symptom 1 Insatiable hunger of CEO
Fraud Symptom 2 A Weak CFO
Fraud Symptom 5 Insufficient focus on organization
culture and processes
The following link is to a variety of links about controls
to prevent intentional subversion of the financial management
system.
Protecting
Against Theft, Fraud, Forgery, etc.
Also consider
Risk
Management
Risk
Management With Boards of Directors
CRITICAL OPERATING ACTIVITIES IN YEARLY ACCOUNTING CYCLE
Now that you have a basic sense of the overall accounting and financial management process, we'll look at the key parts at the beginning of the overall process, including budgeting, managing cash and credit.
Financial Planning
Financial planning works from the strategic and business plans to identify what financial resources are needed to obtain and develop the resources to achieve the goals in the two types of plans. Typically, financial planning results in very relevant and realistic budgets -- budgets are addressed later on in this topic. So be sure to consider business planning for each of your products and services.
Financial
Planning in Business (Wikipedia)
Small
Business Financial Planning -- the Basics
7 Tips for Business Forecasting
The Ultimate Guide to Setting SMART Financial Goals
Course 2: Financial Planning and Forecasting
Strategic
Planning
Business
Planning
Budgeting and Managing a Budget
A budget depicts what you expect to spend (expenses) and earn
(revenue) over a time period. Amounts are categorized according
to the type of business activities, or accounts (for example,
telephone costs, sales of catalogs, etc.). Budgets are useful
for planning your finances and then tracking if you're operating
according to plan. They are also useful for projecting how much
money you'll need for a major initiative, for example, buying
a facility, hiring a new employee, etc. There are yearly (operating)
budgets, project budgets, cash budgets, etc. The overall format
of a budget is a record of planned income and planned expenses
for a fixed period of time.
Small Business Budgeting
The Three Primary Types of Financial Capital
Is Your Budgeting Process Killing Your Strategy?
Managing Cash Flow
As a new business, your biggest challenge is likely to be managing
your cash flow -- probably the most important financial statement
for a new business is the cash flow statement. The overall purpose
of managing your cash flow is to make sure that you have enough
cash to pay current bills. Businesses can manage cash flow by
examining a cash flow statement and cash flow projection. Basically,
the cash flow statement includes total cash received minus total
cash spent. Cash management looks primarily at actual cash transactions.
(Thanks to the Women's Business Center for a very useful set
of links!)
Basics of Cash Management
The Importance of Cash Management
Techniques for better cash flow management
Basic Cash Management Techniques
Techniques
for Improving Cash Flow
Man oh Man, Don’t Run Out of Cash
Preparing a Cash Flow Statement
Preparing Your Cash Flow Statement
Cash Flow Worksheet
All About Cash Flow Analysis for Your Small Business
Preparing Cash Flow Projections and Forecasts
More
information on doing cash flow forecast
How to Make Cash Flow Projections
Short-Term
Cash Flow Projections
Managing Your Checking Account
For a new business, your check register very likely will be
your primary means to record and track cash. Whether yours is
a new business or an established business, you'll need to know
how to manage your bank account. See
Checking
Account Lessons
Managing Your Checking Account
Credit and Collections
One of your biggest challenges in managing cash flow may be
decisions about granting credit to customers or clients, and how
to collect payment from them.
Know your rights: Fair Debt Collection Practices Act
Credit Granting Authority
Budget Deviation Analysis
You learned above that a budget depicts what you expect to spend (expenses) and earn (revenue) over a time period. Budget deviation analysis regularly compares what you expected, or planned, to earn and spend with what you actually spent and earned. The budget deviation analysis can help greatly when detecting how well you're tracking your plans, how much to accurately budget in the future, where there may be upcoming problems in spending, etc. A budget deviation analysis report might include columns with titles:
Planned for Month |
Actual for Month |
Difference |
% Deviation |
Test - What is the Quality of Your Financial Management Practices Now?
Before reading more in this topic, you might get an impression of your own financial knowledge and practices now.
So, based on the results of the test, what do you want to improve? Consider the guidelines in the rest of this topic.
ACTIVITIES IN YEARLY ACCOUNTING CYCLE: Financial Statements and Analysis
Financial Statements
To really understand the current and future conditions of your
business, you have to look at certain financial statements. These
statements are generated by organizing and analyzing numbers from
your accounting activities. You should understand the two primary
financial statements, the Profit and Loss Statement (or Income
Statement) and the Balance Sheet. (Some sources believe that there
are other primary statements, too, such as the cash flow statement
or change in capital, etc. However, the Income Statement and Balance
Sheet are the two standard statements for any business.) The following
links will give you an overview of these two key statements, and
we'll soon get into them in more detail later on below. Here are
several perspectives on the statements.
Basic Guide to Financial Statements
The Accounting Journal - An Important Part of
the Bookkeeping Process
Using Financial Statements
How to Read and Understand Financial Statements
Understanding Financial Statements
Financial Accounting and Financial Statements
Profit and Loss (Income) Statements
These "P and L" statements depict the status of your
overall profits. These statements include much money you've earned
(your revenue) and subtract how much you've spent (your expenses),
resulting in how much you've made money (your profits) or lost
money (your deficits). Basically, the statement includes total
sales minus total expenses. It presents the nature of your overall
profit and loss over a period of time. Therefore, the Income Statement
gives you a sense for how well the business is operating.
Understanding
Income Statements
Income
Statement Analysis
Balance Sheets
Whereas the P and L statement depicts the overall status of
your profits (or deficits) by looking at income and expenses over
a period of time, the balance sheet depicts the overall status
of your finances at a fixed point in time. It totals your all
your assets and subtracts all your liabilities to compute your
overall net worth (or net loss). This statement are referenced
particularly when buying or selling a business, or applying for
funding. Here are several perspectives.
Basics
About Balance Sheets
Understanding Balance Sheets
Balance Sheet Analysis
Financial Analysis
Financial analysis can tell you a lot about how your business is doing. Without this analysis, you may end up staring at a bunch of numbers on budgets, cash flow projections and profit and loss statements. You should set aside at least a few hours every month to do financial analysis. Analysis includes cash flow analysis and budget deviation analysis mentioned above. Analysis also includes balance sheet analysis and income statement analysis. There are some techniques and tools to help in financial analysis, for example, profit analysis, break-even analysis and ratios analysis that can substantially help to simplify and streamline financial analysis. How you carry out the analysis depends on the nature and needs of you and your business. The following links will help you get a sense for the "territory" of financial analysis.
Profit Analysis
There are a variety of ways to help determine profitability
of your business.
Calculating
Profitability Ratios (scroll down)
Cost-Volume-Profit Analysis
Calculate Cash Flow Ratios When Doing Financial
Analysis
Break-Even Analysis
The break-even analysis uses information from the income statement
and cash flow statements to compute how much sales much be accomplished
in order to pay for all of your fixed and variable expenses. Fixed
expenses are expenses that you'd have regardless of the level
of sales of products or services (eg, sales, rent, insurance,
maintenance, etc.). Variable expenses are incurred according to
the level of sales of products or services (eg, sales commissions,
sales tax, freight to ship products, etc.). Break-even analysis
can help you when projecting when you'll make a profit, deciding
how much to charge for a product, setting a sales goal, etc.
How to Do a Breakeven Analysis
Break-even Point
How to Perform a Break-Even Analysis
Ratios
There are a variety of ratios that can be used to help determine the current
and future condition of a business. The following links provide explanation
and procedures for using those ratios. The ratios are produced from numbers
on the financial statements. Note that the usefulness of ratios often are from
comparing ratios from different time periods in the same business or from industry
standards for a type of business, eg, manufacturing, wholesale, service, etc.
Overview
of major types of ratios and how they're computed
Financial Ratio Analysis (Definition)
Financial
Ratios (different types)
Evaluating Your Financial Management Practices
The following assessment tool asks about each of the best practices and can
give a good impression of the overall quality of financial management practices
in a business.
Evaluation
of Financial Management Practices in Businesses
SPECIAL TOPICS
Financing Major Purchases
Cost of Lease vs. Purchase
Leasing Office Space
Cost Cutting
Business Cost-Cutting Ideas
Cost-cutting ideas for Small Businesses
Commentary: Cost-saving measures for businesses
short of layoffs
26 Cost Cutting Ideas for Your Small Business to Reduce Expenses
Temporary Cost Cutting Measures Violate the Wage
and Hour Laws
Recession Cost-Cutting No-Nos
Boards and Understanding Financials
Scrutinizing Financial Statements The Sum of All Parts: Redesigning Financials
Also consider
Organizational
Sustainability
GENERAL RESOURCES
Various Types of Financial Resources
Sources of Online Assistance and Information
Getting and Using Banking Services
How to Set Up a Business Bank Account
Closing a Bank Account Without Going to the Bank
Have a Treasurer to Help You?
Officers and Roles - Treasurer
Accounting Software
Business Calculators
Business Calculators
SpreadsheetLight
Also consider
Business accounting and finance advice covering bookkeeping, cash
flow, and payroll
Getting
and Using a Lawyer in the U.S.
Business.gov
All
About Business Finance
Supersites
Learn More in the Library's Blogs Related to Financial Management in Businesses
In addition to the articles on this current page, also see the following blogs that have posts related to Financial Management in Businesses. Scan down the blog's page to see various posts. Also see the section "Recent Blog Posts" in the sidebar of the blog or click on "next" near the bottom of a post in the blog. The blog also links to numerous free related resources.
Library's
Business Planning Blog
Library's
Building a Business Blog
Library's
Strategic Planning Blog