In his book Rich Dad Poor Dad, Robert T Kiyosaki talks about four crucial skills a business owner must have to ensure smooth functioning and sustainable growth. These skills are Financial Management, Accounting, Law, and Taxation. While we can learn the basics of each of these things, hiring professionals well-versed in the industry is best. However, for a person involved in management, a basic understanding of these disciplines is necessary to make an informed decision.
When it comes to financial management, we must understand that it is important because it allows us to utilize and organize our resources. Effective use of resources through efficient financial management tools ensures we gain a competitive advantage and fulfill our promised objectives.
This also helps in delivering promised objectives to the stakeholders. These tools and techniques are also crucial if you want to ensure sustainability for your business. Finance is a complex job, and there are multiple technicalities involved. However, several tools are available today that make this task easier than it looks. In this article, we will talk about some tools and techniques to help with the effective management of finance.
Common-Size Statements
Common size statements represent financial figures in percentages related to a common base. In this technique, a common base is chosen based on the size, and all the other figures are reduced to percentages with respect to that common base. This helps in the vertical analysis of figures and data.
This technique is used on balance sheets and income statements, and it helps identify causes that lead to a material change in figures. Using this technique, items in a financial statement are shown as percentages of a common base. Similarly, the ratio technique is also used to represent an item with respect to the total number of times.
Trend Ratios
Trend ratios are crucial to tracking the performance of an item in the market. In this technique, the index movement of a financial item is presented over more than one accounting period. This technique is widely used for the statistical analysis of a financial item. The trend of financial items helps in behavioral analysis and preparing a forecast for the coming quarter.
While preparing trend ratios, the base accounting period has to be selected first. Once the base period is locked, we assign the index number of 100 to it. The trend ratios for the subsequent accounting periods are calculated in accordance with the base index. This technique is also used to calculate the trend percentage for a particular financial item. This helps in incorporating required changes in the strategy leading to a sustainable model.
Fund flow analysis
In the corporate dictionary, the fund refers to the “net working capital” of a business. The fund flow analysis technique maps changes in a concerned financial item between two balance sheet items. Fund flow analysis reflects upon two important details; the new resources that have been added to the balance sheet and the way in which the organization has utilized those resources.
Essentially, fund flow means the way in which organizational funds are moving that is causing a change in the net working capital position. Fund flow statements expose the net increase or decrease in the working capital.
This net change is further analyzed through the statement of change in the working capital position. Fund flow analysis is a crucial technique because it allows the organization to analyze the manner in which working capital is being utilized. Long-term financial goals are set in accordance with the fund flow analysis statement.
Cash-flow analysis
A cash-flow analysis is less complicated than a fund flow analysis because it maps the cash burn of an organization. Legally, all business entities are required to maintain a cash-flow analysis statement. A cash-flow analysis is a crucial technique because it allows businesses to look at the liquidity position of the organization.
A cash-flow statement contains information about the net change in cash flow resulting from operating, investing, and financing business activities. The statement essentially reflects cash receipts and cash payments.
The cash-flow statement summarizes the opening and closing balance of cash in a given accounting period. Additionally, certain instruments that are deemed as cash equivalent are also taken into account.
Ratio Analysis
Ratio analysis is the industry-approved method of analyzing the financial statement of a company. The ratio is a common index used by financial analysts to track the performance of a business. This is a common method to represent one figure in terms of another. The two figures to map the ratio are usually mutually independent of one another.
While preparing the ratio analysis report, the data and figures of two concerned financial items are used. Using such data, the final financial appraisal is published. The ratio analysis technique is an efficient way to quantify an organization’s performance.
This report is helpful when the business is trying to develop business strategies for the subsequent financial year. The report also contains a comparative analysis of past and present ratios for the same financial instrument to give an idea of growth and weaknesses. Additionally, the report also contains several ratios that various departments can use within the organization to prepare a SWOT report.
Working capital management
Working capital is used to fund the growth of a business and invent in operational expenses. Therefore, for the smooth functioning of business operations, efficient use of working capital is necessary.
Several techniques and methods are used to ensure efficient working capital management, such as ABC Analysis, economic order quantity, fixation of inventory levels, cash management models, etc.
Capital budgeting techniques
Capital budgeting techniques are used to prepare a long-term investment strategy for the business. These techniques are used to analyze the growth of long-term instruments that will help increase the wealth of the company as well as the owners. Proposed capital outlays and their subsequent financing is decided by passing the plan through capital budgeting models.
Capital structure
Capital structure techniques are used by analysts to develop a model that will maximize shareholders’ wealth. Several financial tools, such as EPS-EBIT, financial break-even points, operating and financial leverages, indifference point analysis, etc., are used to develop a capital structure model.
Accounting software
Accounting software has been immensely popular with large corporations. This software is an assistive tool that helps make the data layouts for thorough analysis. Additionally, the features provided with this software help in the easy computation of data. There are several popular accounting software to choose from.
However, not all of them are suited for modern needs. If you do not have a long-standing collaboration with SaaS platforms, it’s best to go for modern accounting software. The new accounting tools support cloud-based entries, POS software integration, etc.
Expense tracking software
Expense tracking software is an indispensable part of employee management and financial management services. Software like these help track employee expenses during official tours and visits. When a company employee is touring for official purposes, several expenses need to be reimbursed.
However, certain expenses are personal and cannot be charged to the company’s account. Therefore, find a tracking software that integrates with your accounting software and provides real-time update services.
However, be careful when buying the services of such tools. Because some of these tools are designed for large operations, so they are expensive. You may not need that sophistication if you are a mid-sized firm. So, do your research before signing up on any platform.
Budgeting tools
If you are a financial manager in a company, it is your responsibility to ensure that the company is not spending more than what is required. It is important to keep a track of the cash flow to build a sustainable financial management model.
As discussed earlier, corporate budgeting refers to the task of keeping track of cash receipts and cash expenses. Usually, firms use their accounting software reports to keep track of the cash flow.
Payroll management
Employee salary expense is more expensive than it looks. We can say that it is one of the heavier expenses that a company has to bear monthly. Therefore, we cannot afford to make mistakes in payroll management. A simple managerial or clerical mistake could cost a fortune to the organization.
Therefore, it is crucial to deploy software for this purpose so the margin of error can be minimized. Additionally, you will have to ensure that the software you engage can scale simultaneously with your business.
This will also help you financially because you won’t have to pay heavy bills for mid-level use. Also, you will have to ensure that the payroll management software can be integrated with the accounting software.
Billing software
If your organization is engaged in a B2B service of goods or services, getting paid timely can be a huge concern. Suppliers have to face delayed payments on account of poor market, which affects their cash flow and working capital, and management. Additionally, deferred payments affect the investment plans for the suppliers and hinder their day-to-day operations that require consistent cash burn.
This is where billing software can be of great assistance. If you are a supplier company, it is best to use billing software that could generate your invoice on the go. Additionally, this software offers flexible payment plans and options. So, you can structure your bill payment for a buyer according to their needs and requirements.
You can also use this software for a dynamic discount on advance payments, which will help maintain stable cash flow. However, ensure that the billing software you use is compatible with your accounting software so you can easily import data from the cloud when preparing reports. Lastly, you can modernize the billing technique by integrating your software with third-party payment applications to ensure seamless transactions.
Inventory tracking software
If your firm operates in an industry where it has to manage the inventory, you must invest in robust inventory tracking software. Today, the businesses that need inventory management are the ones that are in the e-commerce space. If that is the case, your entire business model and profitability depend on consumer satisfaction.
One important aspect that dictates consumer satisfaction in the e-commerce space is the timely delivery of goods. For the timely delivery of goods, proper inventory management is required. Now, if you are a small business and your inventory is located in one place only, you may not need sophisticated management tools.
However, if you are a mid-sized firm, you may want to expand and scale as you move forward. For this reason, you must invest in inventory tracking software. Software like these offer a centralized solution and ensure efficient management of inventory. When investing in one of these tools, ensure they are compatible with your accounting software.
Tax preparation tools
Corporate taxes take a big chunk out of a company’s earnings. If your organization doesn’t save on taxes, your corporate budgeting and corporate structure system will suffer. Additionally, you will face a fund shortage, making it difficult to fund new ventures. Therefore, you must invest in robust tax preparation tools to save big bucks during corporate tax filings.
An efficient tax preparation tool should be able to import data from all the departments. That is to say, your tax preparation software should be able to import data from accounting software, payroll software, payroll management software, and billing software.
Additionally, these tools should be able to create an organized data structure that could be accessed easily by the company accountant. If your financial management tools do not integrate with third-party tools, your financial data will be in deep trouble. Therefore, keep this in mind when buying the services of these tools.
Conclusion
Financial management is crucial to ensure the long-term sustainability of the business. Additionally, with the availability of several tools and techniques, a firm can track its financial items in real-time and make a strategy accordingly.