Financial Stewardship in Businessby Michelle Bomberger | February 5, 2018
Our FOCUS event this month will highlight the impact of the new tax law changes for your business. I cannot speak with any authority on that topic, but, in my opinion, the tax changes simply highlight the importance of strong financial stewardship of your business. We spend a lot of time as business owners focused on taxes – specifically, the reduction of them – but high taxes typically result from a successful business throwing off lots of cash. There’s only much you can do from a business standpoint to decrease your tax burden. It is equally important to think about whether you’re investing in your business to maximize its capacity and effectiveness. A few key factors to help you be a responsible steward of your company’s financial health:
- Business owners should look at how the resources at their disposal are working for them and consider what metrics are appropriate to evaluate the overall effectiveness of the business. First, consider what the critical assets are to your product and service. You should know whether those assets – whether people, machines or money – are being used to their maximum capacity. This analysis requires you to understand how the asset is used and what it costs to produce your product or service. Some metrics may be utilization, cost of goods sold ratio, and net and gross profit margin. The metrics you choose must be tied to the drivers of the business’ financial stability and success and should include leading indicators so you know when your financial position may be at risk.
- Cash flow management is another critical success factor in financial stewardship. Just because you’ve got customers and invoices, doesn’t necessarily mean you have the cash to pay the bills. Timing of cash into the business and out of the business must be managed and you must understand the cash cycles of your business. A line of credit may be needed to bridge tight times and you should have a relationship with a bank so that your line of credit is there before you need it.
- Financial controls need to be in place to eliminate fraud. Many small businesses are victims of fraud because the owners have trusted their financial managers without any oversight. It is essential to have processes in place for deposits, withdrawals, check writing, and petty cash. A separation of activities across the finance function is important; but you, as the owner, must also review the bank statements and financial position of the company regularly and be informed of any irregularities.
- You must also lead by example. If you want your employees to be thoughtful and thrifty with the company’s money, you must demonstrate the same care.
Often, it’s easier for business owners to “delegate” financial “stuff” to the bookkeepers and accountants, but much of what is needed for strong financial stewardship comes from the top. To create a strong company, you must set the stage, lead by example, and monitor your financial position.