Successfully running a business entails investing money at a certain point and taking it out at a later stage with a higher rate of return. With timely and accurate decisions, business owners can significantly enhance profitability.
Therefore, a thorough and well-thought-out financial decision-making process will yield better results. Primary financial know-how and accounting literacy are must-have skills for any business manager.
This knowledge will enable the manager to make timely decisions that can positively impact the business’s finances. Following are some of the ways with which you can enhance the financial decision-making for your business:
Get expert advice
Financial analysis isn’t everyone’s cup of coffee. It requires a significant amount of expert knowledge to crunch numbers and makes sense out of them. Therefore, having an experienced CFO helps.
However, while companies and businesses with deep pockets may have the means to hire such a resource, smaller-sized ventures may not. If your business falls in the latter category, it is best to seek expert financial advice from outside.
For this, it helps if your business’s primary headquarters are located close to your city’s financial hub. Nonetheless, you can use the internet to look up a few helpful services in this day and age.
For instance, if you happen to run a local business in Queensland, search for “financial advisor Brisbane” to shortlist a few companies that can help with your money matters. The city has a par excellence financial consultancy sector that has added significant value to the local businesses over the last many years.
Your financial consultant will guide you through various essential and intricate financial decisions and their implications on your business’s immediate and long-term profitability. Similarly, do the same for any other city you’re operating in.
As a side tip: ensure that your selected company/agent for consulting has relevant, industry-specific experience and adequate exposure for optimal solutions.
Analyze financial statements thoroughly
Financial statements are the heart and soul of your business translated into dollar terms. These documents contain valuable information with which you can quickly assess your business’s present and future financial health.
Therefore, you must be able to read and understand your business’s different financial statements. This includes the balance sheet, income statement, statement of cash flows, and statement of changes in equity. It is best to familiarize yourself with the technical jargon mentioned in these documents to avoid confusion and misinterpretation.
The balance sheet of a business is also known as its statement of financial position at any given time. It depicts the accounting value of your business assets against the liabilities owed by the business. The balance sheet also provides information about the capital or equity that owners have invested in the company.
The income statement is also called the profit and loss statement. It shows the revenues generated by the business against the expenses incurred in achieving these revenues. The difference between the revenues and expenses is the profit gained by the business, more commonly referred to as the bottom line.
The cash flow statement depicts how the cash is generated and consumed by the business through its operating, investing, and financing activities. It is needless to say that accurate financial statements lead to better decision-making. Therefore, ensure that these documents are always up-to-date. You can use the latest technology and software to help you in this process.
Prepare accurate projections
As a business manager or owner, you are constantly planning for new business projects and initiatives. It is essential to understand and analyze the financial implications of such business ventures.
You must predict the right amount of money you need and the cost of capital the business will incur. You should also be able to predict the expected rate of return (ROI) on the employed investment.
It would also help to have a precise estimate of the tentative cash flows of the project so that the business does not run out of cash while executing such a project. Collecting and compiling accurate financial information will significantly help you out in this process.
Make a budget and stick to it
Budget-making is an integral constituent of the financial planning process of any business. It involves forecasting all the expenses and outgoing cash flows of a business in a given period. This enables the management to plan ahead and initiate the necessary arrangement of required resources well before time.
Proper budgeting also portrays the strategic vision of the managers and decision-makers of the company. The allocation of funds for different departments reflects how business goals are aligned and whether the company has its priorities in the correct box or not.
The budget is also a handy controlling tool. You can set a list of tangibles to be achieved by the business in a given time frame. You can then refer to the budget at a later point and evaluate performance.
The budget also inhibits excessive utilization of the available funds as anything exceeding the budgetary allocation gets highlighted through the financial decision-making process.
Democratic financial decision-making is the key
Collective wisdom should be the driving force behind critical financial decision-making in any business. Although managers and owners may be inclined to take such matters solely upon themselves, the inclusion of other team members can lead to more innovative solutions.
Your team members are your greatest asset, and it wise to utilize their wisdom smartly.
You should encourage input from your team and be as democratic as possible. Some people are better versed in financial terminology and comprehension than others, so their aptitude and interest can benefit the business.
On the other hand, some team members may be good at spotting bad investments based on experience on intuition. Therefore, make the process more collaborative instead of a one-man-show.
Quantifying financial performance is a must
Past data is essential for correct and appropriate financial decision-making. You should be able to translate the performance of your business over the previous years into financial metrics.
These metrics will give you a sense of direction and rationality about the past operation of the company and its future outlook. You can also identify some problematic areas that require renewed focus and new corrective actions.
Gross and net margins, return on equity, and operating cash flows are some of the KPIs seasoned decision-makers use to analyze the business’s financial strength and stability.
A business must create monetary value for all stakeholders in order to survive the cut-throat competition of today’s business environment.
With the help of intelligent financial decision-making, you can add considerable efficiency and profitability to your operations. The tips mentioned above will enable you to have a beneficial and diligent decision-making process that will lead to improved financial health.