Helping Small Businesses Fulfill Their Purpose through Financial Management

Small businesses exist for many reasons but all share a common purpose:

  • They must be worth pursuing, as envisioned by the person or persons starting them
  • Once pursued, they must continue
  • To continue, they must earn a profit

SMALL BUSINESS FINANCIAL MANAGEMENT is the practice of helping fulfill that purpose and encompasses the following steps:

Get the numbers right

Proper accounting and bookkeeping are not always easy to do and can be time-consuming. An organized set of books and financial records is crucial to generating the right numbers. This includes:

  • Determining the proper business form: C Corporation, S Corporation, Partnership, LLC, Sole Proprietor
  • Creating and implementing a proper accounting system and set of books
  • Monitoring the process on a consistent and ongoing basis

If the numbers aren’t right, any attempt to manage your small business to fulfill its purpose could be disastrous.

Organize the numbers

The language of business is accounting. Accounting is the documentation and categorization of financial activity in a consistent format that is generally accepted by all parties who may have an interest in the small business fulfilling its purpose. These include internal users (owners and management) and external users (lenders, investors and various government agencies). The necessary reports flow from the process that gets the numbers right mentioned above.

The most common internal reports those that are tailored specifically to the needs of management in helping them to make sound financial decisions. There is no setlist or format for these reports as there are for the external reports mentioned below, but a few examples might be:

  • Operating budget
  • Budget versus actual variance reports
  • Cost reports
  • Daily cash flow
  • Profit by location, activity or division

The most common external reports are:

  • Income Statement (Profit and Loss)
  • Balance Sheet
  • Statement of Cash Flows
  • Tax Returns

Successfully fulfilling the small business’ purpose requires the preparation of both types of reports on a periodic basis based on the needs of the internal or external users involved.

Find out what the numbers mean

For a small business to fulfill its purpose, its Owner/Manager MUST know how to read, speak and interpret the language of business. An experienced, objective Certified Public Accountant (CPA) is essential to this process and can help in developing a step by step approach to getting the most from the numbers. Specifically, the following concepts must constantly be addressed:

  • Devising and implementing procedures for acquiring enough capital for the small business to purchase assets that will contribute to the production of income. We’ve all heard that the reason most small businesses fail is due to lack of proper capitalization
  • Devising and implementing a strong system of internal financial controls to help ensure the preservation of that capital
  • Once income is being generated, devising, implementing and monitoring strategies to maximize profit, the crucial element in a small business fulfilling its purpose
  • Once profit is being generated, devising, implementing and monitoring strategies to manage the cash flow generated from that profit. Profit and cash flow are two entirely different things and must be managed accordingly
  • Ensure that the small business maintains a strong financial condition so that obligations do not consume hard earned assets and capital. The business must remain healthy in order to continue and earn profit
  • Legally minimize taxes through proper, proactive tax planning and compliance. A small business should never be surprised by and must react to unforeseen tax issues. Tax agencies are often the most interested outside party a small business will encounter and not properly addressing their rules and regulations can be devastating to ongoing success
  • Strategic business, tax and technology planning. Although plans themselves often become obsolete rather quickly, the process of periodic planning is invaluable to the ongoing success of the small business fulfilling its purpose
  • At some point in time, most small businesses fulfill their purpose. Planning for the discontinuance or sale of the business and its proper valuation should always be a consideration.

Conclusion

Most small business Owner/Managers are too busy performing day to day tasks to devote the proper time needed to address the financial functions necessary for continued success. But these functions are crucial to fulfilling the purpose of the small business. Big companies pay large sums to hire a full-time Controller or Chief Financial Officer to address these functions.

Most small businesses don’t have that luxury. However, they can engage an affordable, experienced and expert professional, such as a CPA, whose purpose it is to help their business fulfill its purpose.