In July of 1999, Marvel Entertainment was emerging from bankruptcy. Sales were stagnant, and they were burdened with $250 million in debt.
Their secret weapon to save the business? Smart and strategic financial management.
Peter Cuneo was brought on as Marvel’s new CEO that same year, and his first step was to review the company’s finances, cut back on working capital, and conserve cash. In doing so, he gave the company breathing room, and they used that time to brainstorm strategic decisions. The company managed to power up by merging with the American toy company Toy Biz and selling off the rights 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.
So 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 the long-term success of your business, whether you’re salvaging a sinking ship or jumpstarting the growth of a burgeoning company.
That’s why, to make the most out of your resources, you need to be methodical about setting financial-management goals. By establishing clear goals, realistic budgets, and attainable benchmarks around things like budget maximization, cash flow, and risk management, you’re working towards establishing a sound financial footing.
Here are a few financial management goals you can start working on now to protect your business in the future.
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1. Build Out Your Budget
Budgeting for your business requires a hard look at what happened last month, what happened three months ago, and what this month last year looked like—then using that information to make wise financial decisions for the months and years ahead.
For example, a sound budget will give you insight into the resources you can use on hiring, development, and any other needs. It should also layout your fixed and variable costs; the sales and revenue needed to support key initiatives; and an estimate of expected profits.
Here are a few budget-related goals to help you get started:
Examine Your Revenue
The first step in any budgeting exercise is to look at your past revenue sources. Add all those income sources together to discover what money comes into your business on a monthly basis.
Subtract Fixed Costs
The second step in creating a business budget is to add up all of your fixed costs. This includes things like 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. Many of these are necessary for your business to stay in operation, like utilities. This will likely include things like office supplies or marketing costs.
Not sure if an expense is fixed or variable? Check out this short article on the differences between the two groups.
Build Your Profit & Loss Statement
Making a simple P&L statement is an exercise of addition and subtraction: Add up all of your income for the month and add up all of your expenses for the month. Then, subtract the expenses from the income, and hope you end up with a positive number. If you do, you’ve made a profit! If not, that’s a loss—and that’s okay, too. Small businesses aren’t profitable every month (or even every year). This is especially true when you’re just starting out.
Outline Your Forward-Facing Budget
This is what you’ve been working toward all along. Now that you’ve created your P&L, it’s time to create your budget. This is a future-focused document that’ll help you manage your money and stay on track. For this step, referencing your P&L will help you better understand the seasonal ups and downs of your business, which investments in your business are worth repeating, and what you should avoid in the future.
2. Manage Your Cash Flow
Whether your business is growing or struggling, managing your cash flow effectively could make or break your survival odds.
If you’ve used a lot of your working capital, for example, you may come up against a cash crunch that prevents you from paying suppliers or even paying salaries. That’s why it’s critical to maintain a level of working capital that allows you to continue to operate the business, even when things get a little rough.
Here are a few methods to help your business do just that:
Financial management, at its core, is about boosting efficiency. By analyzing your margins, you can find inefficiencies in your business and strategically prune them. If you are burning cash on unnecessary expenses (think software subscriptions that you don’t use, for example), adjustments are in order.
Manage Solvency and Liquidity
Analyze your ability to pay your long-term debts and short-term debts. You might find it necessary to increase sales or sell off some assets to stay solvent (meaning you have a positive net worth). If you are struggling to stay liquid (which means the ability to quickly turn assets into cash without loss), you can lease assets instead of buying them or analyze your accounts receivable to make sure you are getting paid fast enough.
Your ultimate guide to SMB accounting
Let’s get those books in order.
3. Identify and Learn How to Manage the Risks
There’s no doubt that starting a new 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?
Here are a few goals that’ll help you identify—and mitigate—common risks:
Keep Good Records
Establish 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.
Purchase insurance against death, disaster, and anything else that could potentially jeopardize your business. Although it will cost you some money to buy insurance, the peace of mind it brings is well worth the cost.
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.
Do You Still Have Questions About Financial Management?
Achieving your long-term business goals is a lot easier with a good bookkeeping service. If your books and record-keeping are a mess, your whole company will be disorganized, and progress will slow down. Fortunately, ScaleFactor’s experts can help you take some of the guesswork out of your financials and keep things on track. Request a demo with ScaleFactor today to learn how its software can help you meet your financial management goals.