Why Good Financial Management is Important

Financial management can be overwhelming, especially if you’re new to running a business. When you’re operating and managing a small business, you have a finite pot of cash to work with. Because of this, it’s incredibly important to manage your cash well, and to have clear budgets and spending limits for every area of your business operations.

It’s impossible to run a successful business without having a tight rein over your expenditure. Sales may be bringing in healthy revenues, but the income and profits you’re generating can quickly be eaten up if you’re overspending on operational costs, marketing campaigns, staff payroll, or investments in new hardware and software.

Let’s take a look at why budgeting is such a vital part of your financial management, and what you can do to keep your company on budget and in a positive cash flow position. Here’s three ways to stay in control of your business budgeting.

1. Embrace the power of budgeting

A well-crafted business budget gives you the foundations to become a financially healthy and successful business that’s in control of its spending. If you aren’t already running cash flow forecasts, a simple breakdown of income and expenses in an Excel spreadsheet can be a great starting point.

i) Track your projected sales, so you understand your future revenue numbers and have a solid projection for your income over the course of the year, or budget period.

ii) Calculate your costs, including fixed costs like rent and utilities, and variable costs like inventory and marketing. This gives you an understanding of your total expenditure. Don't forget to factor in business taxes and contingency funds to cover emergencies.

iii) Set clear budgets for the coming period’s spending, based on the total income you’ve predicted, and the total fixed and variable costs you’ve estimated. Always leave some wriggle room to account for inflation and changing costs.

iv) Regularly review your budget, so the document is always evolving. Reviewing and updating your budget helps you stay on track, identify areas for cost-cutting, and make informed decisions about resource allocation. Remember, a budget is a living document, so adapt it as your business evolves.

2. Track your budgets, income, and spending

Setting the budget isn’t the end of the process. It’s important to track all income and expenses, and to update your budget in line with the current health of your business finances. Using the tools available to you in your accounting software can help you record your incoming and outgoing transactions in real time, so you can work with the most up-to-date numbers and financial data when reviewing and reworking your budget. 

To improve your tracking:

• Use codes to categorise your expenses in your accounting software. This makes it easy to categorise each expense as it’s incurred, and it’s then simple to review your financial reports and to analyse your spending patterns.
• Review your spending – check your spending against each code and see where budgets are on track, or where there’s overspending that’s threatening your budget. Are there subscriptions you can cancel? Or could you renegotiate rates with your suppliers?
• Plan for seasonal trends and patterns – tracking your income and expenditure helps you to spot, predict, and plan for the financial ups and down you’ll experience over the year. The more you understand your cash flow, the better equipped you are to stay on budget, make solid strategic financial decisions, and avoid unexpected shortfalls.

3. Forecast for the future: don't just track the past

Basing your budget and financial strategy on historic data is a great foundation stone. But you can also use this data to project the data forwards in time and create useful cash flow forecasts. For example, you can:

• Get clear cash flow forecasts – based on your historical sales trends and projected expenses, you can quickly estimate your future cash flow. Having this view of your future cash position is extremely helpful when setting out your budget for the period.
• Plan out your budgets and cash management – with forecasts at your fingertips, you can plan for seasonal fluctuations, identify potential funding needs, and make informed decisions about the short, medium, and long-term strategy of the business.
• Be ahead of the curve – with solid budgets, forecasts, and a great overview of your finances, you can be more in control as a business owner. Whatever the market throws at you, you’re better prepared, agile, and ready to respond.

Talk to Us

We can assist you with getting on top of your budgeting. We can streamline your record-keeping, bookkeeping, and financial reporting, as well as give guidance on budgeting, forecasting, and financial management to ensure your cash flow and budgets are always looking positive and healthy.