Looking to expand your business and need to learn important measures of your success? Find out more about financial management for your business in this article. 

Discover:

  • What is financial management?
  • Why is financial management important to small businesses?
  • What are some best practices for managing business finances?
  • How to better manage your finances with Countingup

Whether you’re launching a new business as a sole trader or new company director, learn how Countingup can help you build your business to new heights.

What is financial management?

‘Financial management’ is the process of managing and recording your business’ finances. 

While it sounds simple, there are a number of different performance indicators for your business you should know about. Each one tells a slightly different story, therefore, it’s important to know what they all mean to get a big picture of your business’ financial health. 

Below are some key indicators of financial performance to record while running your business:

Income: Money your business receives. This is usually from customer purchases but can also come from refunds or sales of business assets (like machinery or stock).

Expenditure: All of the money you spend on your business and is sometimes referred to as ‘expenses’. Examples include things like rent or utility payments, delivery costs for raw materials and advertising costs.

Cash flow: All the money your business has flowing in and out of it at any one time (sales, investment, stock purchases, sales, etc.). Monies you receive are ‘inflows’, while cash you spend goes down as ‘outflows’.

Revenue: Money your business receives directly from sales to customers.

Profit: The money you make from your business. Gross profit is the profit you make directly from your product or service while net profit the profit you make after all your business costs have been accounted for.

Expenses: The money you spend on things to run your business and can be categorised in a number of ways. Expenses on goods is the money needed to make your product or provide your service (raw materials, software, etc). Operational expenses are the money you spend to run your business more generally (electricity, advertising, taxes, etc. Variable expenses are costs to your business that can change (based on production or usage) while fixed expenses are set costs (like rent or software fees).

Tax: A specific type of expense HMRC applies to net profits you have left over each year.

Investment: The money your business uses to grow. Investment can come from your previous profits, business loans or private investors (if you run a limited company).

Assets: The things you or your business own (equipment, car, stationery, etc.)

Liabilities: Financial arrangements your business has (such as debt on credit cards or business loans) or is exposed to (such as payroll commitments to staff or clients who haven’t paid your invoices yet).

Why is financial management important to small businesses?

Managing your finances seems like a lot of work. Is it worth it?

Not managing your finances might make you think you have more flexibility because your costs aren’t fixed or tightly controlled. However, it also means you have less awareness of where you might be losing money. For small businesses, not having this awareness and management is even more worrying because every penny counts. 

Fundamentally, managing your finances is a practical exercise: budgeting and tracking your finances are simple techniques to make sure you spend what you should, where you should. Managing your finances can also help separate your personal and business finances in the early stages before you have a dedicated business current account set up.

However, the true power of financial management comes from how you can learn and use it. Financial management is more than just saving money from unnecessary costs or allocating every penny for investment. As your business grows, you’ll gain insight into where you can improve it. With sound financial management, you can learn how changes in your strategy impact your profits or how close you are to certain financial goals. Importantly, you’ll also see how your finances change as your business grows.

Finally, good financial management will come in handy if you ever try to secure financing from business lenders or investors. That’s because they’ll want detailed information on how your business has performed in the past, and how you plan to use any money you get in the future. Therefore, financial management is a powerful and flexible tool that you need.

What are some best practices for managing business finances?

Hopefully you’ve been convinced of the value of proper financial management by now, but you might still be unclear on how to do it. Here are some top tips for your financial management:

A detailed business plan and budget

You can’t manage what you don’t know – having a detailed business plan and budget is the first step in any good financial management strategy. Even if you make mistakes, lose money, or change it, having a plan for your finances is a starting point for future learning.

Without a plan and budget, your business strategy can be disorganised and any success you do have may be difficult to replicate. Learn more in our articles How to write a business plan and How to budget for starting a business.

Accurate recording

Now you’ve got a plan and budget, make sure to keep accurate records.

Your financial management will be more difficult if you have gaps in your business’ history. Therefore, make sure you have the clearest picture of your business’ health with accurate business records.

Regular reviewing

Going to all this effort to make and maintain a plan is diminished if you don’t use and learn from it. 

Any good financial management strategy should include time to review it. If you’re new to business, you may make mistakes when running your business that cost money. Setting aside time will let you find out when this happens and how you can stop it next time.

Good cash flow

Building good cash flow into your business is hard at first but can be very worthwhile if your business is to withstand sudden changes in the future. Cash flow is a big topic, encompassing all financial aspects of your business. Find out how you can have good cash flow in our dedicated article How to improve cash flow.

It’s simple to manage your finances with Countingup

Countingup is the business current account and accounting software in one app.  With instant invoicing, automatic expense categorisation and cash flow insights, you can confidently keep on top of your business finances everyday. The unique two-in-one app automates time consuming bookkeeping admin so that you can focus on running your business. Find out more here.

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