One of the most important elements of a successful business strategy is effective financial planning and management. To maximize your bottom line, it’s imperative to have a carefully crafted plan that you not only execute well on, but continually assess and adjust. It’s also important to utilize all of the valuation tools at your disposal to maximize savings and minimize inefficiencies to secure your financial future.
In the sections that follow, we’ll break down the four essential strategies to perfecting your company’s financial management:
Evaluating your historical spend
Building your P&L
Setting and then sticking to a budget
Continuously tracking your spend
From there, we’ll cover some of the biggest challenges of implementing financial management, as well as how to overcome them as a business owner.
But first, let’s cover some of the principles you will need to execute these strategies:
Fundamentals of Financial Management
Having a solid financial plan is critical to succeeding in business, and understanding the philosophy of financial management is the key to nailing every stage of the planning process.
To exert maximum control over your company’s finances and set yourself apart from your competitors, you need to make sure that your financial management is fundamentally sound.
The three fundamental principles to keep in mind are:
The purpose of your financial plan is to predict your company's future financial performance. This acts as a forcing function to:
- Forecast financials
- Stress test the key inputs required to drive your growth
- Prepare for the capital requirements your business needs
Your plan must not focus on the short-term; instead, prioritize long-term gains for a sustainable financial future.
A strong plan must be custom-tailored to the specifics of your business model, market dynamics, and organization, and it must utilize accurate historical spend as a key input to help forecast.
These three principles are the lifeblood of a successful financial management business strategy. No matter what strategy you pursue, what type of financial planning you’re engaged in, or what challenges you face, sticking to these fundamentals will see you through.
Now, let’s get into the four strategies.
4 Financial Management Strategies for Success
Your company will find success by custom-tailoring these general principles with the company’s specific goals, needs, and means. With this in mind, here are the four financial management strategies:
Evaluate Your Historical Spend and Historical Revenue
They say that those who fail to learn from history are doomed to repeat it. Same goes with financial management.
Both your historical and current expenses must be tracked accurately.
All financial statements are historical. The numbers can tell you a great deal—where you failed, where you succeeded, areas you improved or need to improve. Your previous numbers act as a barometer, a weathervane that lets you see where your company was at financially in previous quarters or years.
This data gives you the context necessary to evaluate your current financial situation and see the areas where you’re succeeding or falling short. You can use it to judge your current performance against previous years and current targets. From there, you can set new goals and benchmarks toward increasing profitability.
Build your Profit and Loss (P&L)
A key component of your financial statements is your P&L, also known as the income statement. These statements aggregate that historical revenue and expense data and act as a financial summary of your business performance.
These statements act as a summary of your income and expenses, letting you know whether you were profitable or operating at a loss in that given month. Typically, your P&L will cover:
- Revenue (sales)
- Cost of goods sold (COGS)
- Gross profit (revenue minus COGS)
- Net profit (gross profit minus expenses)
These numbers will help you clearly see the costs of doing business and the steps needed to push for continual success and improvement. In the process of tracking historical revenue and expenses to map to your P&L, you'll force yourself to understand each of the components of your business equation.
Set a Budget and Stick to It
Tracking historical budgets isn't enough. One of the biggest components of financial management is proactive budgeting and forecasting.
A budget helps you:
- Set guidelines to manage your spend
- Understand where you have key financial dependencies and predict what you’d need to continue to fund your operations
- Make wise financial decisions to meet your business goals
- Stay on track to maximize your bottom line
Specifically, a finance manager needs to be acutely aware of what gross profits and operational expenses currently are, and what they will become. That way, a responsible planner can minimize all deductions from the top line to maximize the ultimate bottom line—net profits.
To set a clear budget with your team, start by asking the following questions:
What are the projected sales for the period?
What are the direct costs of sales?
What are the operating expenses, including overhead expenses?
- Payroll, including commissions
- Meals & Travel
The previous year’s figures—which you should already have on hand—can be used as indicators of likely sales and costs, helping you create the most realistic budget possible.
The majority of budgeting work typically takes place before a new financial period. That said, budgeting often can and should be an ongoing process. On a monthly or quarterly basis, the finance team should conduct a budget to actuals analysis to see how the company’s actual spend in the previous period compared to what was originally projected, and then measure what can be adjusted.
Proactively Track Your Spend
In a modern business climate, you need to have visibility on every transaction, and the power to reconcile your books in an instant.
Having a corporate card and an automated spend-management platform that provides advanced controls for business allows you to set built-in budgets by user or department. Benefits include:
Real-time visibility over spend data – Know who is spending what, where, and how much in a moment.
Empower managers to oversee their team’s spend – Managers can keep tabs of their team’s spending habits as they occur. These figures can be compared against your budget and P&L sheets to gauge your financial situation.
Automatic sync with accounting platforms – Reconciling your spend is seamless, thanks to built-in synergization with major accounting softwares like Quickbooks and Xero.
Customizable view of spend – Don’t wait for the end of the quarter to see how much you’ve already spent. Powerful tools allow you to take a topline view of your company’s spend or zoom into a single user or transaction.
Ramp’s platform is flexible and works with operations both large and small. Configurations are customizable, allowing you to tailor it according to your specific business needs.
Challenges to Financial Management
Overall, financial management is closely tied to overall company operating management principles. Your books are as a reflection of actions taking place within the company.
The true test of a financial management strategy is how well it holds up under pressure. But avoiding challenges in only one part of successful portfolio management. The other side is facing and overcoming them as they arise. For that, you need preparation, flexibility, and efficiency in all of your business practices.
The two biggest kinds of challenges you’ll face? Evolution and turbulence.
Evolution: Internal Changes
As your company and capital structure grow over time, there are bound to be changes to its internal dynamics. These changes can present challenges for all facets of business, and financial management is no exception.
Financial management may be impacted most by things like expansion and diversification of your services.
The biggest challenges that come from internal changes are:
Shifts in focus or business model – Adding additional services or goods, or modifying your current offerings, can mean major shake-ups in your bottom line. New processes could mean new expenditures, which are counterbalanced by new streams of income.
Expanding and diversifying client base – If you build it, they will come. And the bigger you build it, the bigger and more diverse “they” become. Adjusting to increasing markets and market share means rapid changes to your income and expected growth.
Changing workflows due to personnel changes – Besides expanding clientele, changes to personnel can also spell trouble in terms of reorganized expenditures and efficiencies.
Aside from these growing pains associated with your company’s evolution, some challenges come from shifts in the environment surrounding your business.
Turbulence: External Changes
You offer goods and services that impact the world, and even if you currently occupy a niche, your own success is certain to create competition. A company must always keep an eye on its competitors to stay not just apace but a step ahead.
Here are some of the biggest environmental shifts that complicate financial management:
Evolving competition – As your company grows, your competitors are always trying to do the same. New competitors, or shifts in existing competitors’ position relative to your own, will necessitate constant evaluation and correction of current budgets and risk.
Shifts in the market – The companies in your industry aren’t the only ones changing over time. The consumers of your offerings are also evolving, and these changes translate into uncertainties for your ROI.
Changing laws and regulations – Your business needs to comply with all relevant laws with respect to labor practices and controlled materials. Any changes to these, however slight, can mean major changes to both spending and expected income.
Between these and the internal challenges detailed above, financial management can be difficult to maintain. But luckily, there are fundamentals to guide you. Plus, any business can benefit from implementing flexibility into its financial management scheme.
How to Overcome Challenges
It’s important to foresee the challenge as much as possible, prepare for every contingency, and have a detailed plan of action for all possible scenarios.
But that’s not always possible.
That’s why the other side of strategic management is tactical management:
Strategic management – As detailed above, strategic management is primarily focused on long-term gains, prioritizing stability, and the holistic health of the company.
Tactical management – This form of management concerns short-term gains and adjustments in day-to-day activities. Any successful financial management must strike a healthy balance between the short and long terms, so tactical management involves:
- Shifting current practices to adjust to rapid changes
- Introducing exceptions or special case solutions
Maintaining a balance between these two focuses is the best way to ensure success despite any and all challenges your financial management plan faces.
But rather than doing it all yourself, you can enlist the help of professionals.
Whatever Your Strategy, Execute it with Ramp
A successful financial management strategy can make or break a business.
But what constitutes a successful strategy depends on your company’s objectives, needs, and means. That’s why identifying the proper goals and planning appropriately is the baseline from which every company begins.
Once you have these core steps implemented, it’s time to find the right business card to partner with.
That’s where Ramp comes in.
Ramp is more than just a corporate charge card. It’s an all-in-one solution for financial management—both tactical and strategic. With the Ramp Savings Insights program, you can track and optimize all of your company expenditures. Plus, unlike other cards, our mission is to help you save money rather than overspend. That’s why we don’t charge interest, or any kind of fees, to our valued cardholders.
Interested? See what Ramp can do for your company!
Insight Financial Strategists. 8 Strategies For Financial Success. http://insightfinancialstrategists.com/8-strategies-for-financial-success/
Investopedia. Strategic Financial Management. https://www.investopedia.com/terms/s/strategic-financial-management.asp