Financial Management

"Can you afford this server?" "How long does your cash last?" "When are you cash flow positive?" Every get these questions? As a business owner, if you cannot answer these questions, and many others, you may need some help with financial management.

Cash is king in a start-up company. Managing revenue growth and earnings is essential to a public company. Maintaining profit and cash flow is the bread and butter for an emerging company. No matter what stage you are, achieving value for the shareholders is always the name of the game. In order to be successful at any of these objectives, you have to start with a good plan for financial management.

Financial planning

A financial plan is not just a budget for allocating spending. The plan should be a monthly outlook for the next 12 to 18 months and has to focus on the things that will affect your financial viability:

* Revenue

* Costs of goods and services sold

* Gross Profit

* Expenses for marketing, sales, development and administration

* Before tax profit

* After tax profit

* Cash flow

* Inventory

* Debt

* Capital spending

* Equity

The revenue plan that comes from the sales department is the top line for everything else that follows. The revenue plan has to be thoroughly thought out by the sales executive along with the finance, development, operations and marketing executives. All variable spending is going to be determined by how much is going to be sold by the company for the coming year. Spend a lot of time making sure that the revenue plan is realistic. It if is, the rest of the team can do their work with the revenue plan as the basis.

All the cost items can now be determined by manufacturing, services and support. These are all the costs of materials and labor to make the products and provide the services. In addition support and maintenance costs have to be estimated. This all is easy to say, but there is a lot of detailed work to itemize all the cost items to represent what is needed to support the sales projections. All of these costs are subtracted from the revenue number to determine the gross profit.

Each of the operating departments like sales, marketing, development, administration and finance has to do an expense budget. They have to project their spending over this same time period. Their budgets call for employees, contractors, tools, materials, equipment, software, facilities, travel and many other items. Their work is focused on supporting the sales and being ready for the delivery of future products and services.

Once having these budgets in place, you can now subtract all this expense from gross profit and determine your profit. The month by month cash flow can also be calculated so you can ensure that you have enough money to pay for all the budgeted items.

But this is not all. Other things affect your financial viability. Inventory for example has to be managed so that you don't have too little or too much. Easier said than done, this area can be one of the hardest things to manage and requires constant attention. You may have to take on some short term or long term debt in order to get you through a period of demand for additional cash. This too has to be managed to make sure payment as well as the amount of debt does not get out of hand. Capital goods, those things that probably cost more than $1,000, have to be paid for, as well as depreciated appropriately. The cash flow statement will capture all the capital spending, so you have to manage capital expense as rigorously as you do cost and expense. Of course, equity may have been taken by the company to fund its growth. This money is used for operations, and is also reflected in your cash position.

Important metrics

The financial plan has to be used as a management tool. You have to decide what is important to your business and set objectives and thresholds that your business must achieve. For example, these items can be monitored by the company's executives, and management action can be taken when objectives are not being met:

* Actual amount of revenue - shows if you are achieving your revenue objectives or not, month by month

* Revenue growth percentage - reflecting whether the revenue is growing as expected; with the industry and with your competitors

* Costs of goods - showing that the costs are within the budgeted targets

* Gross profit and gross profit margin percentage - showing that the gross margin targets are being met

* Expenses as a percentage of revenue - for each of the expense categories, is the actual spending within the budget and are they reasonable relative to other companies

* Profit and profit margin percentage - therefore, is the profit what was expected

* EBITDA (earnings before tax, depreciation and amortization) - and was the profit high quality

* Retained earnings - showing if the trends in earnings are on the right track

* Cash flow - this is like the checkbook, in that you know if you have money to pay the bills month after month

* Cash position - and what are the trends for cash flow so you can see if you are on track for the period

* Inventory turns - tells you if you are improving the efficiency of your manufacturing

* Utilization - tells you if your services people are being fully utilized

* Debt as a percentage of equity or assets - insuring that debt does not get out of proportion with your ability to pay it

* Return on equity or assets - telling shareholders that they are getting a good return on their investment

* Capital spending - making sure that you are not letting capital spending get out of hand

Watch the numbers

Whatever metrics you select to run your business, you will need a good management process to make sure the right people are monitoring the financial plan and that action is taken to deal with any variance from the plan. Most good companies make a habit of reviewing the key metrics every month. Some, like sales are monitored weekly. Whatever the frequency, make sure there is enough time to respond to the variances.

Make sure that everybody knows what the financial goals are and why they are important. Get people bought into the reasons for their importance and their commitment to do what it takes to meet them.


Bill Warner is the founder and Managing Partner of Paladin and Associates(, a firm that helps executives create successful businesses by providing a broad array of executive services. He is also Chairman of the Triangle Accredited Capital Forum, an angel investor network that reaches throughout the southeast. Bill has more than thirty-eight years of experience in the computer industry, with the last twenty years as a CEO and general manager responsible for computer s...

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