Financial Management is core to the survival and success of any organization or business. This note explains why good Financial Management is critical if you are aiming to grow your business the following links, lay out key elements of good Financial Management systems, processes and structures and highlight the priorities so that financial management can truly add value and make sure you deliver the growth without exposing the business to too much risk.
In a Nutshell: What is financial management?
You are running your business aiming to reach your ambitious goals but the journey ahead is new to you. The risks are often high, but the reward if you reach those targets is enormous.
The purpose of good financial management is precisely to help you reach those targets following the best roadmap without running out of cash, and making sure you can deal effectively with the risks you will meet along the way.
Financial Management is the combination of sustems and processes to ensure you reach your financial goals without jeopardizing the business.
So what’s different about growing companies?
For companies with high growth aspirations, financial management is crucial to reach your targets without running out of cash along the way.
The inevitable cashflow pressures, risks and the need to make multiple crucial commercial decisions in high growth companies mean that financial management shoots up the priority list.
A “steady as she goes” company with flat sales, little innovation or major change from one year to the next may survive with weak financial management, but the same does not apply in a high growth business.
Compare a small business on a growth path against for example the local hairdressers on the corner, who have been in business for years and enjoy a steady level of sales.
High Growth Business are constantly making investment decisions
Most growing companies must invest significantly in new product development – for example a small food company must invest to create new recipes, test new products, develop new packaging, ensure regulatory issues are addressed for new products, find a manufacturing solution, build a brand etc.
All of these initiatives cost money upfront, and you need to check whether the benefits will pay for the upfront investment.
So Growth businesses are constantly weighing up the benefits of investment and need to be able to do quick but rigorous businesses cases to assess whether or not the return on investment compensates for the risk.
Growth means tying up cash in growing levels of inventory and debtors
Growing businesses are often under huge working capital pressure. If you sell on credit to other businesses and you want to grow you will need to plan how to finance the credit period. If you manufacture product you may also need inventory to service customer orders, and inventory ties up your cash.
As the company grows these challenges grow too. Even in a profitable company cashflow often becomes ever more challenging as bigger amounts of money are tied up in debtors and inventory during the growth phase, and often the profits generated are not yet high enough to fund all that is required.
Companies that are not growing are under far less pressure. After the initial working capital needs have been financed, the level of capital needed to finance inventory and debtors is flat whereas the growing company is dealing with growing amounts of money locked up in the warehouse and in your customers bank accounts. The lucky hairdresser does not usually give credit, and does not hold inventory.
Critical Decisions can Make or Break the Company and Need good Financial Guidance
As your company develops and grows, major financial questions will inevitably arise that require sound financial analysis to avoid making costly mistakes. For example:
- Should we outsource production? If so for how long before it makes sense to bring production in house?
- Should we take up an opportunity to develop a new product to address a market gap even though developing the product will require a significant level of investment?
- Should we try overseas market expansion again even though that will require putting considerable money into the market before any sales materialise?
- Should we invest in expansion of our operations/ production facilities/ sales team?
- Should we change our pricing strategy to gain higher market share? How do we price our product at a level that gives us healthy profits but positions our product competitively in the market place?
- Are we exposing ourselves to financial risks such as foreign exchange, internal fraud, customer credit risk and if so what should we do about it?
All of these decisions need careful sound financial judgment to avoid over extending your business, or investing in products, markets or equipment that simply will not deliver an adequate return.
The next notes explain what good financial management looks like, breaking down financial management into clear easily understood components.
This article is written and reproduced with the kind permission by Moira Creedon of Artemis Consulting