Home Finance & Investments The Importance of Financial Management in Business

The Importance of Financial Management in Business

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Starting a new business is one of the great professional challenges and a powerful route not just to economic self-sufficiency but also to industry leadership. Of the many qualities that make a good business leader, financial literacy is not the most important – but it is nonetheless key to setting a business up for long-term success. Whether you are setting up a tech start-up in Liverpool or a food truck business in Leeds, why is it that financial management is so important for you to consider – and particularly so in a stagnant economy like this one?

Start-Ups and Risk

In order to properly establish how important financial management is for businesses, it is key to lay some groundwork on the business landscape at present – and on the inherent risks associated with business start-ups. First, a sobering statistic: one in five start-up businesses fail before the end of their first year of trading. That number only increases over time, too, with more start-ups floundering than thriving over a 5-to-10-year period.

The risk of failure is evergreen, but the high risk we’re seeing now is a result of the complex interplay between various national and international factors. Economic stagnation, combined with high-interest rates for borrowing and high inflation of costs, has created dangerous ground on which to build a business. So how does one make shrewd financial decisions to start a business in such hostile territory?

The First Year

Given the 20% risk of start-up failure in year one, focusing on your first year of trading is a shrewd move. The better your initial position, the more likely you are to establish a solid business with longevity in mind. Preliminary research and financial management are crucial for this; not only do you need to have comprehensive market and consumer data driving your business, but you also need to have a comprehensive understanding of your financial standing.

This includes the amount of initial investment you’ll need to get off the ground. It is rare that a successful business starts without seed funding from somewhere, be it a business loan or angel investment. Having a proper grasp of your business’ financial demands will minimise problems further down the line.

Growing Your Business

Growing your business after that first successful year is, effectively, an exercise in cashflow. At this point, help from a bookkeeper in organising and advising on your finances is a shrewd investment. Handling finances and payroll in-house can increase the risk of errors and reduce the amount of control you have over your cashflow.

Cashflow is, of course, the flow of money in and out of your business at a given time. It does not reflect your profits or expenses, but rather the balance between money paid in and money leaving. Negative cashflow, where more money leaves than enters, is a basic early sign of financial issues – and one which can worry investors. This is true no matter what the money is being spent on, which is why further investment in infrastructure can be a dangerous thing if not properly managed.