Jan 4, 2023

A Guide to Financial Management for SMEs

What is Financial Management?

Financial Management is strategic planning, organising, directing, and controlling of financial undertakings in a company. It refers to applying management concepts to budget, manage, forecast and control a company's financial resources to maintain a company’s daily operations, develop new businesses, and maximise the profit.

The Importance of Financial Management

Financial Management is vital for a company, especially for SMEs, as it directly affects the financial stability of a company both now and in the future, and here are some reasons why financial management is needful to a company -

Provide financial transparency to investors and employee
Improve the accuracy of financial analysis and forecasting
Provide insights to make financial decisions
Reduce unnecessary expenses and costs
Maximise profits and overall value of the company
Assist in achieving economic stability
Help in financial planning

Objectives of Financial Management

In order to scale and be successful, SMEs need to manage the finances effectively, and here are some critical objectives that SMEs need to be kept in mind -

1. Profit Maximisation

SMEs should ensure to achieve maximum profit in the short run and long run of the business. This objective should be considered as the top priority and SMEs have to make the right decisions by using appropriate financing methods and tools.

2. Maintenance of Cash Flow

Cash flow is a measure of how much cash a business brought in or spent in total over a period of time, and it is a key indicator of the financial health of the business.

A healthy cash flow can help SMEs pay bills, invest in new opportunities, and grow their business, while negative cash flow will make a company increasingly hard to fund their daily operations, which may finally lead to a failure or bankruptcy.

3. Efficient Financial Planning

Efficient finance can help to distribute funds to all departments of a company properly, which is beneficial in increasing the efficiency of the company.

An efficient financial planning enables SMEs to balance their cost and risk to protect the company, but at the same time, stay flexible to be up for any sudden changes or unexpected challenges.

The Scopes of Financial Management

Financial management is comprised of following areas -

1. Investment Decision

It involves the evaluation of risk, measurement of cost of capital and estimation of expected benefits from a business project.

2. Financing Decision

It involves decisions regarding composition or mix of assets, financing mix or financial structure of a company.

3. Dividend Decision

It is to determine whether to distribute all the profits in the form of dividends or to distribute a part of the profits and retain the balance. Also, to decide the optimum dividend payout ratio.

4. Working Capital Decision

It refers to the investment in current assets and current liabilities.

Financial Management for SMEs

In order to keep the business going, it is essential for SMEs to keep monitoring their finances closely. However, we all know that tracking all financial activities is complicated and time consuming. To solve this problem, and to improve the overall efficiency, you may consider implementing an all-in-one financial management system.