Importance of Finance Management in a Business and its Top 5 Benefits

Financial management is the very factor between the success and failure of your business, especially if you are a startup. For, a startup is necessarily a growth-hacking vehicle that requires smart and efficient finance management as its engine. 

But unfortunately, most startup owners realize this much later, when they finally make the heartbreaking decision to give up, because despite their great business idea and great struggle through the years, their business never quite took off.   

A look at the business cycle of a startup will reveal that most of the challenges at the various stages have got to do with financial decisions – sourcing, allocating, controlling, spending, and investing in finance. Let’s go deeper into this. 

The startup business cycle has four stages after incorporation – the startup stage, the growth stage, the expansion stage, and the maturity stage.

Startup stage – Most companies experience losses and negative cash flows during this stage as they are loaded with many targets at a time – finish developing a product or service model, start marketing and selling, recruiting people for essential tasks, etc. Financial management is extremely important during this time. While revenue only trickles in, money gushes out to meet salaries and other expenses.

The challenges at this stage are:

• Managing cash reserves
• Procuring material for production
• Regular bookkeeping and accounting 
• Starting marketing and sales campaigns
• Establishing market presence.   

Survival and Growth stage – This stage is reached after your business has endured through the initial phases, such as product and business development, setting up office, and recruiting personnel. There is a constant addition of new customers and a stable flow of revenue that meets your operating expenses and also makes room for more opportunities. But, there is also an increasing competition that forces you to fine tune your business model and use proven methodologies.  

The challenges at this stage are:

• managing increasing revenue
• managing increasing customers
• Bookkeeping and accounting management 
• Spending on brand promotion 
• Maintaining a healthy credit rating 

Rapid growth and expansion stage – Having reached this stage your business is a thriving company with an established presence in the industry. You are looking poised to expand your business into new markets by spreading its roots through distribution channels. You need to plan and budget more funds for the expansion drive – whether to use internal funding, borrow money from banks/lenders, or induct venture capitalists into the board.

Also it’s important to keep the momentum of your company’s success through gaining a larger market share and introducing new products. This will further your company’s revenue growth and cash flow, and require you to look for suitable investment options for the profit amount. 

The challenges at this stage are:

• Deal with the rising market competition
• Arrangement of low-cost funds for expansion
• Preventing balance sheet from being overly leveraged with debt
• Introduction of new products/services
• Finding the best investment options for the profit margins.

Maturity Stage – Your company has matured and is a leader in its industry after a successful expansion into new regions. At this point, your company has a stronghold on the market. Your company may continue to grow, but not at the same rate as before. Due to increased competition and productivity issues, the profit margin may be reduced. 

The challenges at this stage are:

• Heightened market competition
• Accounting management 
• Restructuring of management
• Expansion to new markets
• Introducing new products/services                                                                                                                                                  

The above analysis gives us a perspective that every activity in a business has a financial angle, and therefore good financial management is paramount for the good health of a business.

But if you are a new startup owner who would rather have some tangible reasons to consider financial management, here are five straight benefits to change your view:

Superior cash flow management

Cash flow – the amount coming in and out of the company – should also be clearly defined in your financial plan. Of course, you’ll spend more than you earn at first. But how will you stay on track, and what is an acceptable level of spending? You’ll also need to figure out how to easily measure cash flow as part of this strategy.

Sensible budgeting

This is obviously linked to cash flow management and cost reductions. After you’ve determined how much money you’ll need to spend – whether for sales or investments – you’ll need to set your priorities right to justify spending.

Prompt and effective crisis management

When in crisis, the first thing that usually happens is that you review and re-build your plans. Which, of course, necessitates the existence of a well-defined business plan in the first place. 

A well-thought-out financial plan will keep all provisions to carry out crisis management in a prompt and effective manner. You’ll not have to start from scratch every time as you’ve already identified the most significant risks and the key levers to pull in response.

Big help for fundraising 

Raising funds or capital from banks or other investors is an essential activity of a growth-oriented company that follows a definite business plan. Whether you’re a new startup, a well-established company in need of a small cash injection, or a large company requiring serial investment, you’ll need money at some point.

And your business plan will be the first thing any potential investor or bank will ask for. They want to know how you plan to expand the company, what risks and uncertainties you’ll face, and how you’ll invest your money wisely.

Investors require a financial plan that speaks to them, and the better your track record of planning, the more likely they are to trust your projections. Whether or not you need money right now, a business financial plan is a valuable tool to have in your arsenal.

Preempt compliance issues 

For any business, being compliant with tax and accounting, and other laws is absolutely important in order to avoid penalty or closing down in the worst-case scenario. Good financial management incorporates all the necessary compliance updates in tax regulations and accounting standards to eliminate the chance of errors and adverse effects.

Conclusion

As the company grows, new obstacles occur, and unanticipated crises strike, a good financial strategy keeps you focused and on track. It also helps you to communicate clearly with employees and investors, as well as transform your business into a modern and transparent corporation. Learn how to create and implement a sound financial strategy for your business with our online finance course. In just 45 days, you’ll learn everything you need to know about personal finance, investing, and business finance.