What is Financial Management in Small Business: A Short Guide
Running a brick-and-mortar retail store can be adventurous, especially if you are getting in the game. You're an inventory manager one day, and the other day, you're an accountant.
Even if you have hired people, it becomes essential to deeply understand one of the most serious aspects of running a business, i.e., financial management.
Although it might seem like a simple word, it has a universe of techniques and best practices wrapped inside it.
So, let us begin with the most basic question: what is financial management in small businesses? Why is financial management important for retailers?
What is Financial Management in Small Business?
So, what is financial management in small business? Financial management is the practice of organizing, planning, and controlling financial activities and transactions in the business. It is at the foundation of every critical decision you make as a retailer or a business owner.
Whether it is
· Managing financial resources like revenue,
· Meeting employees' financial needs like salaries, or
· Allocating budgets to different projects,
All of them come under the purview of financial management. The overarching goal of financial management is to make sound, practical, and profitable financial decisions to ensure the success of the business and the people involved in it.
Some key technical aspects of retail store financial management include:
● Budgeting
● Cash flow management
● Reporting
● Forecasting
● Debt management
● Bookkeeping
Importance of Managing Finances for a Small Business and Retailers
Financial management, as mentioned earlier, is a foundational element for retail businesses. Here is why.
1. Making Important Business Decisions
Financial management is foundational in helping retail entrepreneurs make pivotal business decisions.
With well-kept financial records, you can closely examine revenue and expenses and allocate funds to expand or make your business more efficient.
It also helps you understand how to cut costs in areas that are not bringing you sufficient returns and redirecting your resources to more profitable segments.
In short, a clear picture of your finances helps you make consequential decisions in an informed and documented manner.
2. Financial Reporting for Banks and Investors
Sooner or later, your retail business will need funding in case you are looking for expansion. Statistics indicate that about 80% of SMEs potentially look for new funding sources.
Sound financial reporting helps in two major ways.
· It paves the way for potential lenders/investors to see how well you can manage money, ultimately increasing the chances of acquiring a loan/investment.
· It also shows them that you're a responsible business owner who understands the importance of financial management.
3. Risk Management, Strategy, and Forecasting
When you don't know your goal, you're more likely to make poor financial decisions.
Having reliable financial management systems for small businesses helps develop a more informed strategy and forecast business health in the coming years. You can use that information to make projections and reduce potential risks.
Without the financial data, the whole process is merely shooting in the dark.
Essential SMB Finance Management Tips
Following are some essential SMB financial management tips that you can easily apply to your brick-and-mortar retail business.
1. Developing a Comprehensive Budget
It all starts with the budget. A comprehensive budget helps you monitor progress, devise profitable strategies, and establish financial goals.
Budgeting also involves regular adjustments depending on how the business performs and which areas need more (or less) money.
Your budget must have some fundamental components like:
● Income
● Expenses
● Savings
● Taxes
● Debts and repayments
● Profit/loss projections
● Financial goals
Budgeting is also essential to maintain financial discipline as it helps record every bit of money that goes in and out of the business.
2. Cash Flow Management
Cash flow management refers to monitoring the cash that goes in and out of the business (inflows and outflows).
It helps you maintain a working capital essential for day-to-day and unexpected expenses. The goal of cash flow management is always to know how much cash you have and how much you need to spend on a particular day.
Saving up an emergency fund (in cash) is one of the best practices in cash flow management.
3. Regular Bookkeeping
Even if you've hired an accountant, you must examine your account books regularly. Ideally, you should allocate time each month or each fortnight to review the books.
Doing so will help you
· Familiarize yourself with the financial health of your business
· Identify any unexpected discrepancies, and
· Protect you from potential financial crimes like embezzlement
4. Bifurcation of Personal and Business Finances
Separating personal and business finances is a key aspect of responsible financial management. It involves things like:
● Having a separate business bank account
● Using corporate credit cards
● Setting a salary for yourself
Doing these things creates a distinction between your personal and professional life and protects you from unexpected legal setbacks.
It also simplifies things like tax filing, claim deduction, and income tracking of your business.
Lastly, it also helps you leave a positive impression on investors, banks, credit bureaus, and vendors.
5. Sound Debt Management
Debt is a beneficial tool for retail stores when used correctly. Therefore, pay great attention to managing your debt and keeping good credit.
Ideally, you should pay off debt as soon as possible. Ensure that you follow best practices like not letting your business credit cards run a balance for more than a couple of weeks.
Whenever you're interested in taking a loan, ensure that you can afford it in the long run. Never go for funding that is huge but seems difficult to pay off.
6. Seek Professional Advice
Answering "What is financial management in a small business?" may seem simple on paper, but it often involves technicalities a new entrepreneur might not know.
Ideally, you should consult a professional accountant, a financial advisor, or a veteran business coach to help you navigate this financial labyrinth.
Hiring the services of these professionals will set you free from researching, learning, and experimenting with things on your own.
Top Financial Management Systems for Small Businesses
As a retail store owner, it is important to take advantage of software technology by using accounting systems and financial management software.
With their help, you can streamline your financial management efforts and study the data in a visual manner.
Here are some of the most popular financial management systems for small business:
· Vena
· Anaplan
· Cube
· Workday
· Prophix
Summing it up
If you're just starting a retail store, there are two ways to go about financial management.
The first is to learn what is financial management in small business with all its nuances. It will take time, and you may make mistakes you might not recover from.
The second is to consult experienced professionals who can protect you from serious financial pitfalls while you focus on scaling the business. One such group of professionals is business coaches.
If you want to explore how a business coach can help you make responsible financial decisions, hop on a free discovery call here!
