Overview of key components of financial management


Key message: Financial management is not about looking backwards, it is about looking forwards.

This note explains the key elements of financial management using an easy to remember metaphor of a journey to an unfamiliar destination across unknown and challenging terrain. Running a high growth company is just like that. You have great hopes and goals, but even if you are a serial entrepreneur, you have never brought this particular company to those goals before – and it is likely to be pretty tough at times.

 

Lets start with a definition of Financial Management: “Financial Management is about reaching your targets in the optimal way, making sure you have the right resources to get there and helps avoid exposing the business to too much risk” To break that down into concrete elements, imagine you are sitting in a car somewhere horribly cold, about to set off on an important journey to a distant cross border destination you have never visited before. You know you will have to make the journey under really tough winter conditions, the route and terrain are completely unfamiliar to you, and you have to get there on time for a critical appointment. What would you like to have in that car? You will probably come up with the following list:

a) A good SATNAV to plot the best route to your target and to keep you on track to get there on time.  This represents clear target setting, realistic and clear financial planning and timely accurate reporting systems.  Target Setting and financial forecasting

b) A full fuel tank and some form of ongoing access to cash to buy more fuel and if you are crossing very difficult terrain (central Australia?) a plan of where to stop for more fuel when you run out. You might even need to carry cash in several currencies depending on your chosen journey. This represents cash management.  Cashflow Management 

c) Snow chains, a puncture repair kit and blankets in case you get snowed in. This represents financial risk management.  Financial Risk Management 

d) Personal and car related papers: passport, licence, tax and insurance This represents compliance reporting – producing legally necessary financial reports on time when called for. Compliance Reporting

e) Fully functional and accurate car dashboards dials, making sure the engine is ok, the outside temperature is not too scary, that you have enough fuel and that you are travelling fast enough to get to your destination on time This represents financial KPI reporting and risk monitoring. KPI reporting

f) A rev counter: making sure you are not wasting fuel or trashing your engine This represents good financially rigorous commercial decision making systems which ensure that you:

  • Invest your capital in good projects,
  • Develop new innovative products and services that are commercially viable and deliver a good return,
  • Price your products in a way that optimizes long term profitability,
  • Manage your product and customer portfolio to avoid wasting resources on unprofitable activities and maximize the benefits of the good ones.

All of these decisions require rigorous financial processes to make sure your money is not wasted, just as the Rev counter stops you wasting your fuel by prompting you to change gears. Financially Rigorous Commercial Decision Making

 

This article is written and reproduced with the kind permission by Moira Creedon of Artemis Consulting