A business that runs out of cash is out of business.
Proactive financial planning, directing, monitoring, organizing, and controlling the monetary resources of a business is how you avoid running out of cash—the number one cause of business failure.
Overview
Financial management holds accountability for the planning and control of business financial resources. At its core, it involves acquiring and utilizing money necessary for efficient business operations. Below are the four primary business functions performed by finance:
- Financial decisions about when, where, and how a business should acquire funds through either equity capital or debt.
- Liquidity decisions to protect the business from insolvency. Since current assets do not earn anything for a business, the finance function protects the business from over-investing in current assets.
- Capital budgeting is the allocation of capital to long-term assets to get maximum yield in the future. It also involves selling assets that have become less profitable and less productive based on the opportunity cost of the asset per the required rate of return (RRR).
- The amount of profits earned drives dividend decisions and whether to distribute all the profits to the shareholder, retain all the profits for business development, or distribute part of the profits to the shareholder and retain the other half in the business.
Below are the most common roles associated with the management of the finance function:
Chief Financial Officer: a chief financial officer (CFO) is the senior executive responsible for managing the financial actions of a company. Their core accountabilities involve cash flow management, financial planning, record-keeping, and financial reporting. They will also analyze the company’s financial strengths and weaknesses, provide direction on where and when to invest company funds, manage financial risks, determine the best mix of debt, equity, and internal financing, and propose corrective actions that harm the business’s solvency. They are experts in understanding the business’s past and present financial situation and are an integral part of a company’s financial future.
Controller: the controller is the overseer of a company’s financial health. They are accountable for assisting with the preparation of the operating budgets, overseeing financial reporting, and performing essential duties relating to payroll and the meeting of tax, permit, and licensing requirements. Other responsibilities include the collection, analysis, and consolidation of financial data. Monitors variances, summarizes trends, investigates budget deficiencies, and reports to management on unacceptable expenditures to budget variances. Controllers concentrate on what has already happened inside a company. They prepare financial statements and other reports based on past activity.
Treasurer: is accountable for cash, liquidity, and risk management. The controller is more involved in presenting financial statements, while the treasurer influences how to handle the money. Treasurers focus outward and interact with the bankers, shareholders, and potential investors who provide capital to agree on the best ventures to grow the company’s funds.
Analysts: the primary role of a financial analyst is to work with the financial data of a company to evaluate outcomes from business decisions or investment recommendations. They are accountable for collecting, analyzing, and interpreting financial data as well as preparing reports, financial models, and recommendations for the leaders of a business. They are responsible for tracking a company’s financial performance against a plan, analyzing business performance, and market conditions to create forecasts that help senior management make tactical and strategic business decisions.
In the beginning, the owner will perform all these roles, or they won’t. As the business grows, they are likely to secure the assistance of an outside accountant. Eventually, the size of the business will justify a finance department that includes some combination of the above roles.
