Dr Keen Mhlanga
Once it relates to business, managing finance is a massive task that many companies overlook. A business that manages its finances well and understands where its funds are spent and coming from is more likely to meet its goals and objectives on time and is also well prepared for the worst-case scenario.
A financial plan informs you how much money you have to spend and how much money you have to reinvest in your business. And financial discipline is your willingness to stick to your financial plan. Financial discipline and cutting unnecessary expenses will not provide immediate results, but will benefit you in the long run.
It will be difficult to manage your expenses if you do not have financial discipline and a plan. And you may occasionally spend more than is necessary. You could spend as much as you want because you didn’t make a plan to follow and have no restrictions.
Financial discipline not only allows you to spend your money only when necessary, but it also allows you to use the money you have most efficiently, permitting you to run the business with reduced expenses and eventually wind up with more revenue. Financial discipline is essential for any business or organisation. Every entrepreneur requires a financial plan to formulate a strategy their growth, increase profits, and meet their objectives.
When that financial discipline is set up, a company can take the next steps toward financial independence. Financial independence is characterised by having enough money to cover operating expenses without relying on other partner organisations or financial backers. It provides a flexible financial runway that allows a company to decide based on short and long-term needs rather than the current state of their financial affairs.
Notwithstanding, getting it right is not always easy. The reason for this is that a business has many moving parts that must all work together all of the time in order for it to function. This, in turn, entails ensuring that the small, insignificant details are addressed precisely and decisively every day. In the tug of war that is business, these minor details frequently fall by the wayside as other commitments take precedence and bad habits and inefficiencies creep in. Financial indiscipline is difficult to overcome once it has taken hold.
One of the most important factors impeding a company’s growth is a lack of financial discipline. Missing projections on a regular basis, as well as continual explanations for low profitability, are major red flags. Payment delays, falling behind on statutory dues and wages is another indicator. Financial indiscipline can also be explained by outdated operational systems and processes, such as a lack of basic accounting software.
Because most small businesses are self-funded, combining business and personal expenses can cause confusion and complicate tax planning. Set up dedicated business accounts to maintain cash flow and simplify accounting. Knowing the exact state of your business’ financial status may become difficult without a clear distinction between your personal and business accounts, resulting in suboptimal financial decisions.
Good business management is the key to good financial management. It is not only important to have a strong finance team; it is also important to have a strong business.
First and primarily, master the fundamentals. Deliver a great product or service, build a strong sales funnel, allowing your company to choose which accounts to accept, sell on favourable terms, and closely monitor costs. Every day, successful companies do this.
Pay attention to the big costs, not the minor ones. It is all too common to see minor expenses receive all of the attention while major expenses are treated as sacred cows that must not be touched. Controlling minor costs frequently results in irritated internal and external constituents. Don’t be afraid to question large costs and manage them carefully. You will never have to limit your employees’ visits to the coffee machine.
Successful entrepreneurs constantly compare performance to forecasts, analyse variances, and make necessary adjustments. This establishes an early warning system for detecting slippages and taking corrective action right away. Create mechanisms to prevent poor performance from being rationalised or goal posts from being moved to justify the results.
Above all, do not shoot the messenger. The finance team is rarely to blame for poor performance. Instead, empower the team to generate numbers and communicate them without fear or favour.
Never use your balance sheet to buy turnover, especially if you’re much relatively small than your customer. Borrowing is the lubricant that keeps a business running. However, compromising on payment terms in order to win deals is not a long-term strategy. Businesses that take this path frequently become lax, water down their product or service in regards to quality and innovation, and therefore also create a concoction for long-term catastrophe.
Predicting the future is difficult in times of uncertainty. Systematic scenario planning, on the other hand, can provide organisations with greater confidence in current decisions by enabling actions against multiple potential scenarios that improve operational resilience and financial performance, mitigating many of the challenges associated with predictions in the face of uncertainty.
Scenario analysis generates hypotheses about what might happen by combining real-world data and possible outcomes with critical uncertainties. So every assumption investigates the implications of each scenario within the context of the company’s specific business climate.
It is critical to remember that these scenarios tell stories about what the future might be like. They are not forecasts of what will happen, but rather hypotheses of what might happen, intended to shed light on new opportunities or hidden risks.
Debt management is an important aspect of financial discipline. Simple financing options enable you to capitalise on new business opportunities while taking calculated risks. Borrowing from banks and other financial institutions can help you hedge against business risks and create favourable situations for you and your customers.
Obtain funds while keeping your short-term and long-term business objectives in mind. Once you’ve determined your needs, look for loans with flexible repayment terms, such as low interest rates, extended terms, and easy foreclosure.
Financial discipline is critical for businesses to leverage on emerging market opportunities and become profitable. The financial statements of a company should provide a detailed financial picture. Without strict financial discipline, a company may overspend, which can have disastrous long-term consequences. Companies must practice financial discipline in order to maintain financial stability.
Dr Keen Mhlanga is an Investment Advisor with high skills in Finance. He is the Executive Chairman of FinKing Financial Advisory. Send your feedback to [email protected], contact him on 0777597526.