Why Is Financial Management So Important in Business?

Financial management of your small business encompasses more than keeping an accurate set of books and balancing your business checking account. You must manage your finances so you don’t overspend and so you remain prepared for all expenditures, as well as profit distributions. Your financial management responsibilities affect all aspects of your business. A company that sells well but has poor financial management can fail.

Capital Expenditures

You purchase assets to create income. All your financial considerations of capital expenditures must balance the amount of income the asset will produce with the amount it will cost. If you manage your capital expenditures effectively, you will not overextend your company by borrowing too much for assets that don’t provide enough income to justify the expense.

Operating Cash

You must manage your cash flow so you always have enough on hand to pay for rent, utilities, telephone, insurance, payroll and supplies. This means you must look ahead and see when your accounts receivable are due and compare that to the due dates for your outstanding bills. You can manage your cash flow by shortening the amount of time you give customers to pay and by renegotiating due dates with vendors. If you fail to manage cash flow effectively, you may not be able to pay expenses and keep your company operating.

Lowering Expenses

One of your financial management responsibilities is to keep costs as low as possible. You can ask vendors for lower prices, reduce the number of employees you use, reduce energy use and purchase supplies in bulk. If you do not monitor and manage costs, your company will always have to increase sales dramatically to pay rising expenses.

Tax Planning

Your financial management duties include planning for taxes. This involves making sure you have cash on hand to pay estimated tax payments each quarter and also timing your purchases of major assets to get the maximum benefit. For example, if you know your current tax year will not require a heavy tax payment but next year will, you can postpone buying major assets until next year when you will need the tax write-off more. Failure to plan for taxes and maximize deductions can cause your company to spend more than it has to on taxes.