Effective financial management is so inseparable from company expansion that it can either make or break a business. It is the one important tool that gives a line of direction on every other aspect of the business and can offer each department peace of mind if rightly handled, while being a cornerstone of decision-making in general. Poor money-handling techniques, at the same time, can have serious results.
See the most common mistakes in financial management:
1. Confusing business finances with personal finances
This is a common mistake, especially in small businesses and sole proprietors. Imagine that at the end of a work week, all the money you earned is saved in a drawer and your home electricity bill is paid with that money. How much did you have? How much was left? By the end of the month, how much was the profit and how much did you get as salary? Merging of the legal entity finances with your personal finance makes everything confusing and misleading.
2. No cash flow forecasting
Besides the expenses you have had today and will have tomorrow, it is also very important to project what you will have to pay in the coming months and the income that will come in during that period. This will help in making long-term plans and also permit comparison with what was foreseen together with an analysis explaining why things went as they did, or did not.
3. Not having inventory control
The company’s inventory must always be recorded and updated according to the sales and purchases made. Calculating the ideal inventory to minimize storage costs and optimizing purchases so that discounts can be obtained are also great strategies for improving your finances. By giving up inventory control, the company is at the mercy of fate, and may have high emergency expenses or goods stored for so long that they become obsolete.
4. Not having knowledge about the company’s operating income
Knowing your company’s monthly income is essential for good management. Knowing how much profit you have made in recent periods, where that money came from, how much money has left the company and where that money has gone, you will be able to analyze the reasons why some months are better than others and cut unnecessary expenses. This information can be obtained from a Statement of Income for the Period (DRE), a very simple accounting tool to use.
5. Not developing a financial plan
Only by planning in advance can you compare the estimated results with the results achieved by the company. Managing a company without planning would be like setting out to sail without planning a route: sooner or later you will end up lost. And sometimes, by the time you find your way again, it may be too late.
6. Not knowing how to calculate the ideal selling price
How much do you spend to produce your product, including raw materials, labor, and fixed costs? Moreover, what is your margin of profit on this? How much discount can you give your customers without compromising your cash flow? Comparing prices to competitors is not an acceptable method. You need to calculate your ideal selling price to get the most out of your product’s sales.
7. Not knowing the company’s equity value
Are you aware of the value of your company? Adding up all the assets and products it contains, what is the value of your assets? Only by knowing this information can you analyze how much your company is growing over the years and project long-term scenarios so that it continues to evolve more and more.
8. Failure to keep records of transactions carried out by the company
All transactions—from buying paper clips to acquiring new equipment—must be accurately accounted for in order to be analyzed at the end of some period.
9. Not developing a standard tool for managing finances
For finances to be recorded correctly and effectively, a standard tool must be created for this control, even if it is just a notebook in which all transactions are noted.
10. Not knowing how to manage the profit obtained
After a good month of sales and a large profit, it is time to reinvest this profit within the company to achieve greater and greater profits. By investing this money in other purposes, the health of the company may be compromised.