Did you know in back in 1999, Marvel Entertainment was emerging from bankruptcy protection? Sales were slumping, and the company was burdened with almost $300 million in debt. How did they save their business? Smart and strategic financial management.
Later in the year, Peter Cuneo was brought in as Marvel's new CEO, and he began reviewing the company's finances, working on cutting back on capital and conserve cash. He gave the company breathing room, which they used to brainstorm beneficial strategic decisions. The company managed to power through by merging with the American-based toy company Toy Boz and sold off the right to popular characters like Spider-Man and the Fantastic Four.
Marvel's comeback story is a big one, but all businesses—no matter their size—can learn from their strategic approach to financial management.
Why Does Financial Management Matter For Small Businesses?
Managing your finances is so much more than entering numbers into a spreadsheet. Effective financial management means strategically planning for your business's long-term success, whether you’re salvaging a sinking ship or jumpstarting the growth of a burgeoning company.
That's why it's essential to make the most out of your resources and establish financial management goals; once you have clear goals, realistic budgets, and concrete, measurable benchmarks around budget maximization, cash flow, and risk management, work towards establishing sound financial footing.
Here are a few financial management goals you can start working on now to protect your business in the future.
Build a Budget
Building a budget requires you to take a hard look and what has happened in the past and then using that information to make wise financial decisions for the months and years ahead.
Having a good budget will give you insights into your resources and what you can use on hiring, development, and any other needs you might have. It should also layout your variable and fixed costs, sales needed to gain revenue to support important initiatives.
Here are a few budget-related goals to help you get started:
Examine Your Revenue
Review your income sources together to discover what money comes into your business every month.
Subtract Fixed Costs
Add up all of your fixed costs, including rent, supplies, debt repayment, payroll, taxes, and insurance.
Determine Variable Expenses
Variable expenses are the things that change depending on how much you use the service. While many are necessary for your business to operate, many things can be cut, like office supplies and marketing.
Build Your Profit & Loss Statement
Add up all of your income for the month and add up your expenses for the month. Then, subtract the expenses from the revenue, and hope you end up with a positive number.
Outline Your Forward-Facing Budget
Referencing your P&L will help you better understand your business's seasonal ups and downs, which investments in your industry are worth repeating, and what you should avoid in the future.
Manage Your Cash Flow
Whether or not your business is growing or struggling to stay afloat, managing your cash flow efficiently could break your odds of survival. If you've used a majority of your working capital, you may come up against a cash crunch that prevents you from purchasing supplies or paying employees. That's why it's essential to maintain a substantial working capital level, which will allow you to continue to operate your business even if things get tough.
Financial management is about boosting efficiency. By analyzing your margins, you can find places in your business where you are struggling. If you are burning through cash on unnecessary expenses, you may need to consider making a few adjustments.
When you analyze your ability to pay debts (long-term and short-term), you might find it necessary to increase sales or sell some assets off to say in the black. Suppose you are struggling to stay liquid (which means the ability to turn assets into cash without loss quickly). In that case, you can lease assets instead of buying them or analyze your accounts receivable to make sure you are getting paid fast enough.
Manage the Risks
No doubt, starting a running business has risks. So what can you do to improve your odds? More specifically, how can you reduce the financial risks that come with running a business?
Start by establishing a record-keeping system that works from day one. If you create a sound filing system and keep up with paperwork, it can save both time and money when it’s time to pay your bills or file your taxes. Whenever possible, have income from more than one source. If your business starts to struggle, having a backup plan to keep you out of bankruptcy might just save you.
Be sure to save as much money as you can so you can build up some cushion in case of an emergency. This means you may need to focus on investing in your own personal emergency fund.
Are you concerned about your financial management?
Working towards achieving your long-term business goals is easier when you partner with a reliable outsourced accounting firm. If your finances are a mess, your whole company will slow down. Your outsourced accountant can take the guesswork out of your financials and keep things on track.