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Proper corporate financial management is what provides stability to a business and then allows it to grow over time. To many, this subject may appear obscure and, as a result, there is a risk that it may be relegated to a secondary plane. Nothing could be more wrong: it is vitally important.
In the next few lines of this guide we will explain what financial management is and why it is so important to a company’s present and future. Only once this becomes clearer to you will you be able to effectively leverage the best strategies and practical tips to maximize the value and profitability of your startup.
The importance of financial management in companies
Corporate financial management refers to the specific area responsible for planning, organizing, directing and controlling the financial activities of a company.
Proper management of cash flows, as already anticipated, ensures the stability of a business: keep in mind that each business component has a need for liquidity, and it is essential, therefore, to be able to take this need into account and to be able to meet it, without dispersing resources uncontrollably. Keeping the management of the company’s accounts in order and knowing how to plan the company’s financial management allows you to set priorities and direct decisions on how much and where to invest.
Knowing at all times how much money you have is critical even more so for startups: these companies generally have limited economic resources, especially at the beginning of their business.
Marc Andreessen (co-author of Musaic and co-founder of Netscape Communications Corporation) s also convinced of this:
“Financial management is the foundation on which the long-term success of a startup is built. Without financial control, everything else is fragile.”
Corporate liquidity: ensuring financial stability
If you are taking your first steps into the world of entrepreneurship you could easily get confused between the economic and financial aspects of business management.
Let’s be clear about the difference between economic and financial: economic management is concerned with the relationship between costs and revenues and is closely related to the production cycle (specifically, the ability to produce and sell goods or services in such a way as to be able to generate income).
Financial management (i.e., the subject matter of this guide), on the other hand, emphasizes a firm’s ability to be solvent, that is, able to cover its expenses and pay its debts, averting the risk of a liquidity crisis. In fact, an enterprise is solvent when it has sufficient liquidity to cover its expenses and debts.
Financial management: fundamentals and approaches
Unlike economic management, which, as mentioned above, mostly refers to the production cycle, financial management includes many activities related to corporate liquidity, affecting different strategic areas. For simplicity, we can reduce the main fundamentals of financial management to 3.
Financial planning: setting long-term goals
Financial planning refers to the process focused on defining the company’s long-term financial goals and choosing the best strategies and techniques to achieve these goals.
Decisive actions in this regard include budgeting and financial forecasting, forecasting future cash flows, and budget analysis.
Working capital: management and optimization
Managing working capital means managing short-term resources, such as short-term receivables and payables and inventories. The goal is to ensure that the company has sufficient liquidity to meet current obligations and finance day-to-day operations.
Investment and financing: balancing the choices
For proper financial management of your startup you will need to know how to balance your choices between investments and financing. Investments are when funds are used to acquire value or durable assets that can generate returns in the future. When, on the other hand, it is funds that are acquired to finance operations and investments we speak of financing.
Role of accounting in financial management
Accounting plays an absolutely central role in financial management because it is what gives the ability to have a clear, accurate and complete view of the company’s financial and economic situation, which is useful for making better strategic decisions.
Cost analysis and consolidated financial statements
Cost analysis allows you to better understand your startup’s financial structure. Do not underestimate this type of analysis because, through it, you can optimize your resources and increase your company’s operational effectiveness.
Analyzing financial statements is another key step in assessing the financial health of your startup. Consolidated financial statements contain within them all the information of the companies in a group and, therefore, provide a comprehensive overview of the financial performance of the entire group.
Internal auditing: ensuring transparency and efficiency
If you want to check the correctness and effectiveness of your financial processes, you can resort to what is called internal auditing: this is a control carried out within the company that ensures the transparency and integrity of financial operations.
Strategies for effective financial management
Now that you have a clearer idea of what corporate financial management is, you need to know the best strategies to make it effective so that you can ensure a solid and stable present and future for your startup.
Cash flow analysis and optimization
The first tip concerns cash flow and its optimization: it is very important to keep cash flow constant. This implies that income should not lag and expenditures should all be justified and “necessary.”
A monthly financial statement helps you keep an eye on the situation and take timely action when needed, identifying new opportunities to increase revenue, reduce costs or improve the efficiency of business processes (for example, you can launch discounts and special offers or defer operating costs).
In this regard, remember that you can use cash flow management software, which automatically monitors cash movements and provides you with a comprehensive and always up-to-date (real-time) overview of your company’s cash flow.
Proactive risk management
For more effective corporate financial management you need to manage risk proactively: in concrete terms, this means that you need to identify and analyze potential financial risks and take specific measures to mitigate those risks, preventing them from seriously impacting the financial health of your startup.
Strategic investment and fundraising
We talked earlier about investments and financing: you can take action in these two areas as well to increase the effectiveness of your financial management.
The investments you make must be, first and foremost, strategic: that is, they must be aligned with the company’s strategy and contribute in a concrete way to the achievement of the company’s medium- and long-term goals. Your options are many: you could, for example, use the funds to purchase new equipment and instrumentation, but also decide to expand into new markets.
Let us turn, now, to funding: it will not surprise you to learn that being able to raise funds is, of course, vital for a startup. Again, there are many methods for finding funding and investors. A valuable tool at your disposal to improve your company’s financial management is the forecast financing plan, which focuses precisely on funding sources and provides you with valuable information about your “dependence” on outside capital and how the situation is evolving.
