Planning and Implementing

The process of financial management is continuous. Each stage occurs simultaneously in pursuit of different business functions.

The daily navigation of business operations requires financial managers to be attentive and flexible in the management of a business’ financial resources. 

Failure to develop systems to ensure all aspects of this process are undertaken will increase risk of failure.

1: Address Current Financial Position

Ascertaining the current financial state of a business. A constant role in financial management. The current position of a business can involve;

• Level of available cash (liquidity) to make purchases, pay expenses;

• Revenue derived from business activity and resultant profit (loss)

• Level of debt within a firm to finance business activity (solvency);

• Future revenue streams in changing business environment

• Current obligations (30 days) and position of firm to meet them (Accounts Payable - your suppliers);

• Expenses and costs involved with business functioning vs revenue

Once the present position has been clearly understood; the firm must the determine it financial needs to respond to their current situation.

2: Determining Financial Needs

Understanding what external financial requirements are needed to ensure business attainment of goals. These needs are determined by the current situation of the business (cash requirements, liquidity issues, debt, expenses, declining revenue, swift growth).

The financial needs of a business are determined by;

• Size of the business (and legal structure)

• Future plans for growth and development (the plan ahead to sustain revenues)

• Stage of life cycle for firm / situational analysis (and mix of products)

• Skill of management and ability to source finance (short-term, long-term equity / debt)

3: Developing Budgets

A budget is a financial plan for revenue and expenditure that guides decision-making in pursuit of business strategic objectives. It sets out in quantitative terms what the business will outlay in pursuit of future business activity (expansion, new product design, rewards program (anything)… A budget can include:

• Cash required for planned outlays for capital equipment (non-current assets)

• Estimated use and cost of raw material inputs

• Estimated running costs of firm vs forecasted revenue (profit guidance)

• Number and cost of labour hours required 

Budgeting is essential to constantly monitor a firm’s financial activity; however, budgets are based upon best estimates for time / money and do not reflect unforeseen circumstances.

4: Maintain Record Systems

Mechanisms to gather, record and present financial data that is reliable, accurate, efficient and accessible. Business managers must base their decision-making on the basis of an accurate understanding of the actual position of the firm; without systematic process to continually monitor and record business activity, a manager has no vision of reality.

Record systems can be digital or manual; larger firms need technologies that update accounts in real-time on the basis of daily activity. 

Cash flow statements, income statements and balance sheets are just the entry point in financial record systems. Errors should be minimised; accounts are audited (thoroughly checked for accuracy) by external accountants for all public companies. 

5: Identify Financial Risks

Financial risk refers to the possibility that the business will not be able to meets its financial objectives. All business activity involves risk. Financial risks specifically relate to: 

• The level of debt and type of debt used in pursuit of revenue and profits;

• Use of owner’s equity or the timing of an IPO to gain external equity finance

• Changing financial circumstances such as interest rates or availability of funds

• International firms must monitor exchange rates to identify adverse movements

• Possibility of key supplier becoming insolvent

• Projected revenue streams from activity vs debt levels to finance 

The likelihood of various scenarios should be analysed and an appropriate future pathway determine to mitigate (minimise) financial risks as much as possible. 

6: Establishing Financial Controls

Policies and procedures within the firm to ensure business  goals are attained. A firm must implement effective control systems to prevent theft, employee fraud, damage to property, unethical  management of a firm’s financial assets. 

Financial controls can be put in place using:

• Clear authorisation and responsibilities in managerial roles

• Separation of duties (purchasing team / deliveries team)

• Rotation of duties

• Insurance