Last week we talked about pillar one which was Financial Record Keeping.
Today we are going to discuss pillar two which is Financial Management . This pillar focuses on how to manage your cash flow, budgeting and forecasting. See Record Keeping is all about the actual happening while the Management is about predicting when things will occur in order for you to have income and expenses to record. It’s all about effectively managing when and how monies flow into and out of your business. You need not only control your cash flow but also have the fortitude to be fiscally responsible no matter the circumstance.
This is what makes this pillar the hardest one. You have to be able to have control over your cash to ensure that the business stays open and afloat. Some key control factors over your cash are:
- Not paying bills as they come in the door because it will deplete your cash and leave you in a bind when you need cash
- Staying on top of your customers and ensuring they pay you on time so you can figuratively and literally keep the lights on
- Having processes in place that ensure that your cash and other assets are not misappropriated by employees and other management members
Once these controls are in place, it’s time to create a budget for your business. Your budget is where you will predict which months monies will come in the door based on your goals and the strategies you develop on how to reach them. From there you will begin to forecast. Forecasting is a combination of taking your budget and your actuals and projecting forward whether or not you will still reach those goals once you factor in the sales and purchases that have occurred as of a certain date in the year. The result of this forecast helps you see how your cash flow is trending and whether or not you need to make some changes in your strategic planning.
Understanding how your company is trending will give you the insight you need to run your business. It’s not just about your profit and loss, as so many business owners think. You need to understand the effect of the decisions you make and how they play into the numbers of your business. It’s about making those tough decisions and being okay with the outcome.
Monitoring your metrics and having a sound financial management system is necessary if you really want to move the needle in your business.
Next week we will discuss pillar three – Financial Systems.