Mastering Financial Management – The Key to Business Stability

When we talk about financial management, what exactly is it we’re talking about? The term is so broad that it’s easy to get lost in what the ultimate principles are, and if we’re not clear on the principles, how can we begin to master them?

From my perspective as a finance leader, “mastering financial management” follows from considering the appropriate questions. What are our ultimate goals? What is it we’re trying to achieve here?

And I bring it back to the following three things.

Firstly, wealth maximisation: ensuring current and future profits, creating value for the company, finding opportunities to improve bottom line, and making wise investment decisions.

Next, liquidity: we need to make sure we have the appropriate cash levels in place to meet all our short-term liabilities, as well as funds for future growth. Are we planning for future investments that will help develop the company?

Finally, stability: acting in a sustainable way, making investment and financing decisions which are supporting business growth, but ensuring the business can withstand challenging times. Because let’s face it, challenging times are the only certainty in business.

Being clear on what it is we’re trying to achieve is the starting point of developing a strategy, and then we can start to think about how we can maximise wealth, manage liquidity and ensure a stable company. Whilst aspects of the strategy are part of everyday life in a finance department, are we really getting the most value? Are we really thinking about our ultimate objectives? Are we really thinking about financial management as a strategy, or are we simply living the day-to-day?

A good understanding of our objectives helps us in the formulation of our strategy, we can start to break down the important components of financial management.

Top Tip

To master financial management, focus on three key pillars: wealth maximization, liquidity, and stability. Continuously seek opportunities to improve performance, maintain robust cash management, and develop a comprehensive risk strategy that prepares for challenges while supporting long-term business growth.

Working capital/cash management

I put this first, as this one has the most immediate impact on the business. Low profits do not have an immediate impact on the operations of the business, but not having the cash to pay a key supplier or employees could put an instant stop on your business, while not having cash to invest in the future could be unsustainable.

A robust cash management system is essential for financial success. It requires more than just three-month forecasts – it demands forward-looking projections that align with long-term business plans and capital strategies. These forecasts should highlight opportunities, identify potential funding needs, and enable proactive decisions today that secure a stronger future.

Watch out for cash tied up in the business unnecessarily – cash that could fund a much-needed asset or improvement. A robust process that minimises working capital ensures funds can be utilised more effectively. Establish KPIs for this area of the business, focusing on the cash cycle’s duration and identifying ways to optimise it on an ongoing basis. Emphasis should be placed on the term “ongoing”.

Reporting

Financial reporting is vast – as finance professionals we produce reports for multiple stakeholders and provide varying levels of detail. We provide information externally to meet statutory requirements and banking requirements. We must meet the needs of shareholders and provide information to business leaders that gives a clear picture of business performance. Information provided internally works to improve the overall operational performance of the company.

Financial reporting needs to be transparent; I am a huge advocate for sharing as much information as possible; the more people know, the more they know how to make an impact. To master financial management, it is important to maintain a reporting system that ensures all information produced ultimately supports our main objectives. Potential improvement opportunities are highlighted so the wider team is empowered to take action, whilst creating trust by providing total transparency and support.

Risk management

Once, when producing a forecast, I asked a commercial manager what will happen if we don’t secure the planned contracts; he told me that we don’t plan to fail. Whilst I do like that as a general sentiment, in reality, when producing business plans, we must plan to fail.

Preparing for when the plan goes wrong is a fundamental principle in any business. If we don’t understand what could go wrong, how will we mitigate a potential adverse event, and how much time would we lose coming up with a plan? This is time that could be critical to the business. Managing the risks are key to financial management. Ensure the business has a robust risk register which clearly evaluates everything that could go wrong.

From then, we need to put actions in place to reduce potential risk. Risk can never be removed completely – that is part of life – but we shouldn’t stop trying to minimise adversities where possible. We have a much better chance of achieving our business objectives if we are aware of the obstacles that might stop us.

Capital planning

It is all too common to see money leaving a business without ensuring it contributes to achieving the company’s long-term goals. A phrase I like is “Every pound’s a prisoner”, and that’s exactly how every pound should be viewed. A single pound shouldn’t leave the business unless it’s ultimately going to bring a return in line with company targets and growth aspirations.

Planning how to invest money should be strategic; what will bring us a return and what does that return need to be? Ensure complete transparency in the financial rationale. Capital planning will involve considering funding options, of which the investment may come from cash reserves, which reminds us of the importance of good cash management.

If there are no cash reserves available, the business may consider external funding, and planning for this will allow actions to be taken now, reviewing the possibilities and developing required relationships. In any case, the importance of good capital planning has a direct impact on our wealth and company structure; it can aid growth whilst maintaining financial stability.

Budgeting and forecasting

When you read anything about finance or accountancy, you can be sure there will be some reference to budgets or forecasts. This is part of everyday life for any finance professional – the time horizon or level of detail may differ, but all finance professionals will spend time creating budgets and forecasts.

This is where all the components of financial management should really start to knit together, but unfortunately it is a trick frequently missed in practice. The budgets will drive the cash plan and support the capital planning, but all risks should have been considered and factored for, with various scenarios reviewed. The budgets will be used as a measure of performance across the entire business, used in reporting, stating levels of performance, highlighting areas where the business is off track, and suggesting opportunities to bring the business back in line to achieve objectives.

Well-developed budgets and forecasts support us in maximising wealth, help us manage our liquidity, and allows us to plan our capital structure to ensure stability. Our performance against budgets is a key measure of our financial management.

Stakeholder relationships

I have left this one until last, but not because it is any less important – quite the opposite. The relationships we have, both internal and external, can bring unquantifiable value to the business. As a young accountant in an early role, I joined a team building session with other team members from various disciplines within the business such as quality, commercial, production. We talked and laughed about the “pointless” tasks we were asked to complete. Little did I realise that was the start of relationships that would carry through the business, which would bring me benefits that I did not foresee.

Understanding others and the challenges they face is essential for growth as finance leaders. Reporting can be improved to ensure information is clear, relevant, and helps to drive performance. Budgets and forecasts can be developed with greater knowledge and context, and risk management can be enhanced through a deeper understanding of business operations. These internal relationships need to be recognised as the valuable resource that they are.

Externally, we need to build strong relationships with our customers, our suppliers, our banks and funders – good relationships help move businesses forward. In my experience, there are times I would have been unable to overcome challenges without good relationships. Live by this, lead by example, encourage teams to interact, and you will begin to understand each other and the challenges they are facing. This will provide an overarching support in financial management.

Financial management is an ongoing evolution, but clarifying what we are trying to achieve provides a clear vision; maximises wealth, manages liquidity and ensures long-term stability. By making sure we consider these objectives within our cash management, capital planning, reporting, risk mitigation, forecasting and relationships, we are increasing our chances of success, and we are one step closer to mastering financial management.