Improve Your Company's Financial Management

December 2014       Download PDF      Print

Financial management issues present some of the biggest challenges to owning a company and building its value. To achieve sustainable growth, business owners must be able to anticipate and address these issues. The term "financial management" encompasses a variety of activities associated with lowering costs and improving investment and operational decision-making. Some key areas of financial management include:

  • Budgeting and forecasting: Developing realistic forecasts and formulating a budget that is aligned with your company's strategic goals
  • Tracking key business metrics: Identifying, monitoring, and improving upon key business metrics that represent the financial health of your company
  • Improving processes: Evaluating your finance and accounting processes and identifying ways to increase efficiency and improve the quality and usefulness of information
  • Analyzing capital investment decisions: Performing in-depth analysis on investment opportunities and determining which course of action will provide the best possible returns
  • Evaluating internal controls: Evaluating bookkeeping, accounting, and financial reporting procedures and identifying internal control weaknesses that may be exposing your company to error or employee fraud

Neglecting any of these areas of financial management can impede a company's growth and put the business at a disadvantage relative to its competitors. Owners of privately held companies tend to be heavily involved in multiple areas and will often personally handle all or most of the company's financial management activities. Companies may have in-house or outsourced bookkeepers or similar personnel to carry out basic accounting functions. However, it can still be difficult to give financial management the time and expertise it requires.

Once companies reach a certain size, they often hire chief financial officers to carry out these functions and help ownership make informed financial decisions. Unfortunately, many companies don't have the resources to hire a full-time financial executive and, as a result, they neglect many important aspects of financial management.

However, as companies grow, financial decisions become more complex and significant. Companies sometimes find that they still lack a leader with the technical finance and accounting expertise required to make such decisions. This is one of the most common problems preventing companies from realizing their full growth potential.

Below we discuss some common financial management deficiencies that, when ignored, can stifle growth and profitability.

Insufficient Monitoring of Key Business Metrics

As a business owner, you should always be aware of how your company is performing in the marketplace against its peers. By developing accurate metrics relating to profitability, efficiency, and financial leverage, you can track not only how your company is performing internally, but also how it compares to performance benchmarks set by your particular industry or market. Some key business metrics to monitor include gross margin, EBITDA margin, days sales outstanding, outstanding accounts receivable, inventory turnover, and debt-to-equity.

Many companies either do not know their key business metrics or do not properly review them on a regular basis. Deficient tracking and evaluation of metrics can lead to prolonged losses in a product line, operating division, or the business as a whole. Creating, trusting, and understanding the metrics that drive your business are essential to growth and profitability.

Weak Financial Reporting Process

You need to ensure that you have adequate personnel to handle all of your company's finance and accounting functions. Inadequate staffing in these departments can lead to omissions and errors in financial reporting. Inadequate doesn't necessarily mean incompetent. Often, accounting departments simply lack the necessary resources to devote enough time to the financial reporting process.

Employees may be so busy performing daily tasks, such as collection and payment activities, that they don't have time to concentrate adequately on financial reporting. As a result, your staff may prepare poor and untimely financial statements and reports that can then impede your ability to confront issues as they arise. Inadequate reports may also prevent you from staying ahead of trends that are critical to the decision-making process.

Inadequate Processes Surrounding Key Business Areas

If your company lacks proper controls over certain processes, you risk losing revenue and profits, and you may even be exposed to fraud. Appropriate oversight, accountability, and controls over areas such as billing and inventory are essential to protecting your company's profit margins and ensuring your decisions related to these areas are based on accurate information.

A large percentage of fraud cases in privately held companies are the result of weak internal control processes. According to a recent article in the Kansas City Business Journal, companies with fewer than 100 employees suffer an average loss of $147,000 per year due to employee fraud. Companies of this size are most vulnerable since they are more likely to lack the resources or infrastructure to implement effective fraud prevention measures.

One of the most common forms of occupational fraud is asset misappropriation, which comes in a variety of different schemes. Understanding how various schemes can be carried out is one of the first steps in preventing fraud within your company. This article on identifying fraud risks provides various examples of poor internal processes and controls. It can help owners understand where their companies are most exposed to fraud risk and how to begin implementing fraud prevention measures.

External Financial Management Resources

Of course, not every company can employ a full-time CFO and accounting team to prepare budgets, projections, and accurate and timely financial statements. However, most business owners eventually need access to this type of expertise. Whether you need temporary guidance on an important financial decision, are seeking to fill the gap left by a departing finance executive, or need an additional resource to bring key financial management projects to completion, solutions are available.

Some firms provide third-party CFO services that can be tailored to meet the specific needs of companies of all sizes across a variety of industries. Hiring third-party financial expertise is an ideal solution for many companies because it provides them with access to valuable financial advice on an as-needed basis and at a fraction of the cost. Companies can engage third-party CFOs to regularly prepare and present financial reports, or they can hire one as a consultant to help evaluate their current financial management functions. If you recognize shortcomings in your financial management practices, consider seeking external assistance to help fill the gaps. The support of an experienced financial executive could be critical to enhancing your company's growth and maximizing its value.