The CFO'S Perspective

Key Financial Processes Questions and Answers


In the early days of your business, you might have managed your books single handedly or hired an outside accountant to take a peek at regular intervals. As you scale and grow your business, your financial management needs expand as well.

One of the keys to success in just about any sector is strong financial planning and management. This requires taking more than just a backward glance at what just happened during the past month, quarter, or year.

While a full-time bookkeeper can give you some of the controls you require, the truth is that you will need to dedicate more resources to the sound financial management of your business. So, just what is financial management, and where do you begin?

Here are some common questions and answers about key financial processes as they relate to your business.

What is the Main Goal of Financial Management?

Good financial management should maximize the use of your company's resources while also keeping you out of trouble when it comes to meeting certain requirements, regulations, and avoiding pitfalls.

More specifically, some of the primary goals of business financial management include:

  • Maintaining Compliance. If your company's owners get indicted for tax evasion or SEC violations, there won't be much need for strategic planning or any other types of financial management. Before anything else happens, you'll want to have a team in place that ensures 100% compliance with local, state, and federal regulations. This includes any industry-specific laws. For example, a healthcare financial manager should know that the Affordable Care Act requires that no more than 20% of premiums collected be used to cover administrative expenses.

  • Maximizing Profits. Beyond keeping your company in compliance, another goal of financial management is to maximize profits. There are two ways to do this - increase revenue and reduce costs. While your financial leader may not have expertise in every area of your business, they will be able to give you the information you need to make some strategic decisions about pricing, the cost of goods sold, and inventory.

  • Monitoring Liquidity. The number one reason that small businesses fail is that they run out of cash. Even if some of the data depicts a profitable business, your company can still be forced to close its doors if it is cash poor. This is something that your financial management system should alert you to and help you avoid.

  • Boosting Market Share. If your company isn't growing market share in your chosen sector, there are likely unaddressed issues and some room for improvement. Whether you are in a growth or mature market, one of the goals of financial management should be to find opportunities to increase market share to meet strategic objectives.

Why is Financial Management Important?

It's a sad and terrifying fact that 90% of businesses fail in their first ten years and over half (60%) won't make it past year three. When business owners don't consider the potential consequences of their management decisions on the financial health of the organization, the results can be disastrous.

Sound financial management is vital because the activities of every aspect of your business have an impact on its financial performance. It's not enough to have a set of accurate books on hand. Even more critical is what you do with the tools at your disposal to create sound financial management and control.

Financial management is essential because these systems enable you to accomplish daily financial objectives and view important big picture items. As a business owner or CEO, a good financial management system will help you:

  • Manage proactively instead of reactively.
  • Make your operations more efficient and profitable.
  • Plan ahead for financing needs and borrow money more easily.
  • Provide financial planning data to investors.
  • Access an excellent decision-making tool for key business planning considerations.
  • Make better decisions based on timely and complete financial reports.

On a more granular level, financial control and management can help your company and its managers:

  • Perform vital tax planning.
  • Avoid investing too much in fixed assets.
  • Set the right sales goals.
  • Maintain short-term working capital requirements to support inventory and accounts receivable.
  • Improve gross profit margins by pricing correctly, controlling input costs, and other expenses.
  • Plan employee benefits.
  • Perform sensitivity analysis.

What are the Elements of Financial Management?

Internalizing that financial management is vital to the success and survival of your business is only the first step towards making some progress. While you could still try to handle all of this one your own, it would be a tall order.

It generally pays dividends when you invest in the right financial management resources. Some of the elements of financial management that you'll want to focus on include:

  • Your financial management team. When it comes to your financial management team, you may either need to create one or make some adjustments to the one you currently have. Ask yourself the following questions:
    • Is there enough staff in place to fulfill your needs? If so, are your employees assigned to the right roles? If not, what is the plan to hire the right people?
    • Does your current staff have the proper skill sets?
  • Your processes for financial management. The next element of your company's financial management system is its processes. You can have the right people in place, but lack effective ways to get things done. Here are a few questions to ask:
    • Has your company developed financial management processes and are they in line with your company's goals? If not, how do you plan to create or update these?
    • Are your processes up to date with all best practices, reporting deadlines and regulatory requirements?
    • Is your financial staff trained on these processes?
    • What internal controls and oversight have you created?
  • Your financial management systems. The final element of financial management that holds everything together is your systems. A small startup might manage finances with a simple Excel spreadsheet, but these quickly become unwieldy and have many flaws for complex financial management systems. Your company deserves a robust system that will keep it in compliance and provide useful reports through the guiding hand of your financial leader. Ask yourself a few questions about your financial management systems.
    • Are your systems updated enough to handle your company's current needs? If so, when do you think an upgrade will be required? If not, what's the plan to fix this?
    • Is there ongoing training for staff to get the most out of your financial management system? This is a must!

What is the Process of Financial Management?

The right financial management program can have a great deal of influence over the future of your company. It's challenging enough to start and run a business, managing day to day operations, inspiring staff, and planning strategy. The best leaders understand that they need other experts on board that specialize in such things as manufacturing, sales, and, of course, finance.

As your financial managers work to maintain compliance, maximize profits, monitor liquidity, and boost market share, what will they focus on to get the job done? The process of financial management can range from the simple to the complex, depending on the scope of your business. For example, a smaller company might focus more on cash flow management and debt financing while a large company has its eye on resource deployment and asset acquisition.

Some of the main processes involved in business financial management include:

  • Financial Reporting. Timely creation and distribution of monthly, quarterly, and annual financial reports to internal and external stakeholders is just one of the main processes of financial management. Internal stakeholders get the information they need to make key business decisions, and external ones can learn about the stability of the business, with some reporting required by law. This also includes the filing and payment of taxes and other fees.

  • Planning & Forecasting. Financial plans and forecasts are created to boost the efficiency and profitability of the business, both currently and in the future. These include matching the organization's investment and operational activities to its overall cash flow capabilities. Forecasting can also ensure that the firm makes the right choices with regards to long-term assets.

  • Managing Risks. Risk management is a vital financial management process. Your financial managers can not only help reduce risks related to casualty and fraud but those tied to poor planning as well. Several financial KPIs can identify issues and opportunities for improvement relative to profitability and cash flow:

    • Gross profit margin = (Sales - Cost of Goods Sold)/Sales, this is an indicator of how efficiently a company is using its supplies and labor in the production process.
    • Operating profit margin = EBIT/Sales, this shows how successful the company is in generating income from its operations.
    • Net profit margin = Net Profit after Taxes/Sales, this figure sums up how effectively the business is being run.
    • Current ratio = Current Assets divided by Current Liabilities, this ratio measures your company's "current" ability to pay its financial obligations.
    • Working capital = Current Assets minus Current Liabilities, this is another figure that shows how ready your company is to pay its short-term liabilities.
  • Exerting. Your company's financial management function can also exert control over various financial resources with the goal of ensuring efficient utilization. Some of these controls can enhance the scrutiny and security of financial transactions, which can also prevent both internal and external fraud. Failure to put these controls in place could result in dire consequences for the business, as we saw with prior financial reporting scandals tied to companies like WorldCom and Enron.

Whether your business is on a fast-track for growth or you are looking for more control over your financial processes, getting the right people in the right positions is an excellent first step. Once you have a winning team in place, this is followed by creating financial processes, supported by the right systems, that will allow your company to meet its strategic goals.

CFO Selections can help you with interim and part-time controllers and CFOs. We can also help with a search for qualified executive professionals in these roles. If you'd like to discuss your organization's needs, please contact us to schedule a complimentary consultation.

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Topics: Financial Reports, Financial Process

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