Financial management not only involves the process but also having the right team to spearhead the functions of the department.
20% of the businesses barely survive beyond the first year and only 30% of the MSME’s will be able to celebrate their 10th birthday, this is according to Bureau of Labor statistics (https://www.bls.gov/). Businesses are therefore encouraged to implement good accounting practice, hire a well-qualified individual or rather outsource the function to a professional firm. This way, organizations will be able to avert cash flow issues that form a bigger part of business failures.
It is important for all businesses to adhere to basic accounting processes which will give rise to healthy financial management practices: –
a. Do not mix personal and business expenses – The first step after businesses is registered and ready to operate, is for the owners to open a business bank account. The advantage of having an account for the business is to that a business is able to track its transactions (revenue and expenditure) and to prevent use of business funds on personal matters
b. Procure an accounting software – Accounting enables a business track all its revenue and expenses. The software will ensure that business owners get all the information needed for sound decision making. Most owners rarely have financial knowledge required in the running of finance department, hence the need to hire a professional or outsource the function to a competent firm. The importance of having a software, is automating the process of bookkeeping. This will ensure that reports are generated in real-time while limiting the possibility of having errors in the reports.
c. Prepare a business a budget – Then first step in budgeting, is have a detailed revenue projection report as well as anticipated expenditure breakdown. At the period end, these projections can be compared to actual expenditure and the findings can be put into consideration during the next budgeting cycle.
d. Make your bookkeeping accurate – Bookkeeping is considered one of the most important tasks for any business. Technology has made it possible to automate this process while at the same time offering virtual storage for records. Accountants and even the government of Kenya recommend having records kept at least for seven years.
e. Decide the accounting method to use – Each business should have a clear set of rules that govern how and when income and expenses should be reported. This is important as it forms the basis for taxation that should be used. Universally, there are two methods of accounting – The accrual basis and the cash basis. When deciding on which way to follow, it is important for companies to be acquainted with the provisions of Generally Accepted Accounting Principles (GAAP) which recommends the use of Accrual accounting.
f. Books should be up to date – If books are not updated in a timely manner, business owners and business employees will not be fully aware of the company’s financial position. Ways that the business can ensure instant update of the company’s books is through automation of the posting process (invoices & receipts), linking up the accounting software with the bank account. Businesses can also define the matching rule in the accounting system to help with reconciliation
g. Optimization of AP terms – Businesses should take full advantage of credit terms from suppliers to hold onto cash for longer. Only pay bills in a way that does not hurt you cash and most importantly, take advantage of early pay discounts issued by suppliers. In order to avoid cash deficiency, ensure that collections from customers are done on time. Use a software that automates the billing processes and sending out reminder alerts so as to prevent outstanding invoices from piling up.
h. Segregate the accounting function – For public companies, they are required to have these functions separated. But for start-ups and small businesses segregation has proved to be a challenge with many businesses entrusting all the finance function to one person. But this encourages fraud from the people involved. However, small businesses are encouraged to reduce this exposure through some internal controls such as ensuring that the person writing the cheques is different from the one signing and the one doing monthly reconciliations.
i. Keep costs in check – Payroll costs have proved to be the largest expense for most organizations. To minimize this expenses, small business should try and outsource some functions to external contractors. Unlike fulltime employees, who base their fees on actual number of hours worked, external firms tend to offer much affordable fees.
