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Effective management of business finances is important for every business organization. A company ensures it will make profits by managing its finances well. Managers can use several strategies to ensure that they manage their finances well. One of the key strategies that they can adopt is avoidance of spending too much money on the acquisition of fixed assets. This is because such acquisitions will make the company have shortages in its working capital. Another key strategy that companies can use to guarantee efficient management of funds is operating their business more efficiently by reduction of its selling and administration costs. If a company succeeds inefficient management of finances, it will be able to have enough funds for expansion. It will also pay its debts on time leading to a good relationship with its suppliers (Mittal 48). This paper focuses on the efficient management of business finances.
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One of the things that a company can do to ensure efficient management of business finances is choosing good accounting software. Most businesses use QuickBooks and Peachtree Complete Accounting Software to manage their payroll and accounting transactions. Before a company chooses the accounting software to manage its finances, it should first assess its management and financial needs. Also, companies should consider the type of industry that they operate. A company operating in the manufacturing industry should select accounting software that ensures efficient management of inventory. Accounting software achieves efficient management of finances in several ways. It enables a company to manage its finances promptly. This is because it enables the fast production of invoices. Accounting software also ensures the automation of all business transactions of a particular organization. Accounting packages update all business transactions as soon as they happen. Due to this, businesses can reduce errors. They also have strong internal controls that assist in minimizing errors that may occur during the recording of cash received by a business entity (Barringer 39). To add, these internal controls set by the accounting software ascertain that only authorized users can access the accounting information. They help to minimize errors and frauds in the finances of a business.
Further, the accounting software provides financial information to the decision-makers and financial managers of a company. This helps managers to assess the financial performance of a particular company. By looking at the interim and final reports generated by the accounting software, managers can formulate strategies to use to ensure that the financial performance of a particular company is positive. Some packages also help managers to conduct hypothetical planning on their finances. This assists in guaranteeing quality financial management of the finances of a company. Financial information generated by the accounting software also makes it possible for management accountants to formulate strategies to adopt to reduce costs incurred by a particular company (Ryan 97).
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Companies should also secure good sources of funding to manage their finances well. Examples of sources of funding that a company can adopt include seeking equity funding, debt financing, and borrowing from financial institutions. Debt financing is appropriate when a company wants to seek funds to purchase a particular asset. However, financial managers must ascertain that the asset they are purchasing generates positive cash flow. It will help the business to pay for the debt of this particular asset. Long-term loans are appropriate to purchase fixed assets such as plant machinery. Short-term debts such as bank overdrafts are appropriate to finance the acquisition of inventory or paying suppliers. Shareholders of a public or private company may raise equity financing. This form of financing is appropriate if a company wants to conduct a major expansion project. A company can also seek funding through leasing or hiring assets. Businesses seek leasing options if they want to avoid the acquisition cost of an asset (Connolly 61). Some businesses also factor in their debts or other income to have enough funding. It helps the business to get proceeds as soon as it makes a legitimate sale.
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Financial managers need to consider several factors before choosing a method of raising their finances. One of these factors is the cost incurred in this process. While calculating the costs incurred, financial accountants should consider all costs incurred to ensure the source of finances. The taxes paid while raising finance should also be considered. Additionally, the terms of the loan should be taken into account while raising finances. Short-term loans have higher interest rates compared to long-term loans. Commercial mortgages are financed for a period of about 25 to 30 years (Jolly 31). The security required for a particular loan should also be put into consideration. This is because some sources of finances require covenants. Some lenders attach conditions to a certain loan. In some cases, the lender may require a business seeking a particular loan to supply annual accounts reflecting that it makes a profit and positive balance sheet. If the business breaches the conditions stipulated in the covenant, the lender has the right of acquiring the security of the loan. It shows that efficient finance management requires managers to understand the term and conditions stipulated by a particular loan.
Further, companies should manage their working capital to provide efficient management of business finances. Management of working capital deals with the maintenance of efficient levels of current liabilities and current assets (Barringer 64). This ensures that companies have enough capital to meet their short-term obligations. One of the strategies that companies can adopt to ensure the efficient management of working capital is the management of inventory. This will help any company identify appropriate stock levels and preventing stock losses. It also helps an entity to select a good lead time preventing it from incurring huge inventory costs. Financial managers should also put strict measures while introducing discounting policies. If customers are offered huge discounts, a company may end up facing shortages in the working capital (Jolly 102). Due to this, financial managers should ensure that salespeople do over-negotiate a particular sale. Efficient management of debtors also ascertains that a company has enough working capital. Management accountants should monitor aging schedules and debtor balances to avoid the debts of the business from getting large. Each customer should also have his/her credit limit so that a business does not give credit to a customer who is not creditworthy. Overdue accounts should be charged to encourage timely payment of debts.
Efficient management of payables also ensures that a company has efficient working capital levels. A senior official should authorize all purchases. Moreover, purchase quantities should be geared towards the quantities that were forecasted by market demand. An increase in the purchase price of inventory should also be passed to the clients promptly so that businesses recover from this increase. It will protect the business from suffering losses due to an increase in purchase cost. Additionally, financial managers should ensure that they have alternative suppliers to ascertain that a company has supplies to meet the demand of customers. Also, it will help the business get good credit terms and good discounts. Accountants should also calculate stock turnover days, receivables ratios, current ratios, working capital ratios, and quick ratios (Connolly 47). If businesses manage their working capital efficiently, they will manage all finances efficiently.
Effective Budgeting Strategies
Businesses can manage their finance well if they adopt effective budgeting strategies. Budgets are important for the financial success of a company for several reasons. They help the business evaluate its operational efficiency. Operations of any business are efficient if it can meet the operational targets set during the budgeting process. Budgets also help the business to monitor its financial health. Moreover, managerial decisions are made after considering the budget. According to most financial analysts, creating a good budget helps a business to know all the strategies that it can use to reach its financial targets and goals. Budgets also help managers to communicate with employees. It is only the use of budgets that a business can forecast concerning its future financial needs. It helps ensure that a business does not have shortages in cash flow, which may hinder the production process of a business. Budgets also help managers to allocate finances and other resources to different departments in an organization. Departments that contribute significantly to the success of an organization are allocated more funds compared to the other departments (Ryan 71). Budgets also play a critical role in motivating employees to achieve the performance levels set by the management. It assists in improving the financial performance of a business based on the fact that it will have positive finances. Business finances are also controlled by the use of budgets. Managers can measure the progress of a particular organization by comparing the financial status of a company with the budget standards set.
Businesses succeed in managing their finances if they can plan for the strategies to be adopted in case of a financial crisis. During a financial crisis, a business is not able to raise enough finances needed to fund its cost of operations. It causes a business to lose its goodwill, since it may fail to fulfill the orders of its clients. It evidences the fact that financial managers should know their financial position to avoid a financial crisis.
The Financial Position
The financial position of a company can be determined by listing all assets and liabilities. It will enable the company to identify its equity level. Also, managers will be able to know all those assets that are unproductive.
Preparation of strategic audit is also critical during a financial crisis. A strategic audit is prepared by doing a SWOT analysis. This analysis will help a business identify the opportunities that it can adapt to reduce its weaknesses (Barringer 63). Moreover, the reduction of costs of operations helps a company to avoid a financial crisis. Financial managers should reduce all costs that do not contribute to income generation. Restructuring loans can also help a company to manage its finances during a financial crisis. One of the ways that a company can use to restructure debts is timing its loan repayments. This strategy will help the business to pay for its loan as soon as it earns income so that it avoids being penalized. The company can also change its short-term loans to long-term loans to ensure that it frees its short-term funds. This will enable it to meet its short-term obligations more effectively. Risk management analysts advise firms to invest in off-farm assets to ensure that they mitigate their risks. This is because such investments ensure the financial health of a company since a company can sell such assets when it is facing distress.
Overall, companies should ensure efficient management of business finances to guarantee their success. Efficient management of business finances can be achieved if companies choose good accounting software. The accounting software will help a company manage finances promptly. It also helps reduce errors and fraud since such software will record financial transactions as soon as they take place. Securing good sources of finances also makes a company manage its finance well. Companies should choose sources of finances that are not expensive to raise. Financing these sources of capital should also be affordable. Efficient management of the working capital of a company also helps it to manage its finances well. Such companies will not experience shortages in their operating cash flow. Additionally, good budgeting strategies help a company manage finances well.