Introduction
It is very difficult to sustain a small business for the long term. According to a Forbes article, 20% of businesses shut down in the first year, 30% in the second and 50% by the fifth year. Of those that remain, only a third make it to their first decade. So, small companies need to make every effort to do the best they can. And, the most important part of these businesses is their financial management. The more efficient the financial management, the longer they can survive. That’s where Financial Management Software for Small Business enter the spotlight.
Today, we’re going to look at how important it is for a small business to have its finances in order. We will also discuss some common financial management challenges that small company owners often face.
The Critical Role of Efficient Financial Management for Small Business
The most vital and limited resource for a small business is its finances. If they aren’t managed or utilised wisely, then it becomes so difficult for them to maintain operational continuity. It might also be possible for them to face severe losses or consequences. Here are some reasons why efficient financial management is important for them.
- It helps small businesses in strategic financial planning.
- It assists them in the planning and acquisition of funds.
- Businesses can allocate and utilise the acquired funds efficiently to get the most out of their investments.
- With the help of streamlined financial management, you can improve the profitability of your business.
- It helps in increasing the value and growth of your business.
- With proper financial planning, you can make strategic decisions for your business.
- It enables you to understand your financial condition over some time.
- Proper financial management helps you analyse for better forecasts and predictions.
- It provides you with economic stability.
In essence, to optimise your finances and establish a sustainable financial posture, Financial Management Software for small businesses is a go-to solution. It automates the financial management tasks and streamlines operations.
What are the Common Pain Points in Managing Small Business Finances?
Managing the finances of your business manually is not an easy task. As a small business owner, you often encounter challenges such as:
Budget Management
Being a business owner sounds great, but it is not easy. For finances, managing a complicated tax code, employee payroll and other operational expenses often comes with economic instability. Furthermore, proper budgeting can help you plan for unexpected events and make smart decisions – like where to invest and when to expand. Moreover, Financial Management Software for small businesses helps you manage budgets and monitor them in real-time.
Maintaining Cash Reserves for Reliable Financial Health
A strong indicator of a company’s financial health is its ability to pay salaries, benefits and taxes from its available finances. Businesses that can pay employees and pay taxes from their cash reserves are the most likely to survive for a long time. In addition, financial management software for small businesses will help you to optimise the use of funds and better allocate resources. As a result, it allows you to make better decisions to keep your small business in good financial health.
Keeping Track of your Bills Payables and Receivables
The ability to meet your business commitments is a necessary part of sound financial management. It improves your credit score and prevents you from overpaying interest and expensive loans. However, your history of on-time payments is responsible for up to 35% of your credit score. Thus, Best Financial Management Software for small businesses allows you to track all your accounts payable and receivable from a single page.
Debt Control
Regardless of how financially good your company is, it’s likely that you may sometimes require more money than you have on hand. And occasionally it makes financial sense to take business debts. However, taking excessive loans, using up all of your credit limit, or missing payments can harm your credit and negatively impact your business. With the best financial management software for small businesses, you have actionable plans and repayment strategies in place before you go into debt.
Lack of Insights and Analytics
Sound financial analysis is essential for small businesses. However, most start-up owners are failing to implement advanced analytics to gain visibility into their business finances. In fact, without reporting and financial modelling, financial KPIs remain a guessing game. On the other hand, financial management software for small businesses helps in generating analytical reports for smart decision-making. It also improves your ability to optimise operating costs and expand into new markets.
Three Vital KPIs for an Efficient Financial Administration
Generating accurate financial statements is the first step in establishing a streamlined financial order. So, here are the statements that give you the information you need to analyse efficiency, profitability and solvency.
Profits and Losses
The P&L (profit and loss) statement helps you to assess the company’s total profit or loss for a specific time. To generate a P&L statement you need data such as gross and net profit margin, and operating profit margin. Thus, to calculate these margins, here are the formulas:
Gross Profit Margins
Bigger gross profit margins are an indication that your business is efficiently utilising its assets and resources.
“Gross Profit Margin = total sales – gross sales cost / total sales x 100”
Operating Profit Margin
It is also known as EBIT (Earnings before Interest and Taxes). Good EBIT indicates better cost control and efficient financial management. Although, it is calculated by:
“Operating profit margin or EBIT = Operating Income / Revenue”
Net Profit Margin
Increased net profit margins indicate how effectively your business generates profits from sales. Nonetheless, different industries will have different sets of profit margins. Therefore, you can compare net profit margins with your competition to set benchmarks and goals.
“Net Profit Margin = Net Profit / Sales x 100”
Efficiency
Some factors determine how well your business is generating revenue by utilising capital and assets. These factors require data from your income statement and balance sheet. In addition, these factors indicate how much your business owns and how much it owes at a given time.
Return on Assets
It shows how your business is converting asset investments into profits. Moreover, to establish a benchmark, evaluate other companies in your competition. However, it will differ based on your business niche. To calculate return on assets, this formula is used:
“Return on Assets = Net Income / Assets Average Value x 100”
Working Capital Ratio
This ratio serves as a gauge for liquidity and shows how well you can cover short-term liabilities. A working capital ratio of 2 proves better short-term liquidity.
“Working Capital Ratio = Current Assets / Current Liabilities”
Working Capital Turnover
A good working capital indicates how efficiently your company generates sales by utilising its capital. To calculate it, you can use the formula below:
“Working Capital Turnover = Net Annual Sales / Average Amount of Working Capital for the Same Year”
Solvency
Solvency means the ability of a business to pay its long-term debts. To measure it, cash flow statements are used. The cash flow statement indicates how much cash is moving in and out of the company. Moreover, the operating cash flow calculation will indicate how well your business takes care of current liabilities. Here’s how you can calculate the operating cash flow ratio:
“Operating Cash Flow Ratio = Net Income + Non-cash Expenditures + Changes in Working Capital / Current Liabilities”
For Example: If your operating cash flow ratio is 2, that means you are making 2 rupees for each liability of 1 rupee.
Lastly, properly tracking and analysing these KPIs and margins is not an easy task. But financial management software for small businesses makes it possible to accurately manage all these formulas across your books.
Wrapping-Up
Maintaining a well-organised budget and keeping track of your business finances is essential for your business to grow. However, managing the financial reports, invoicing, financial data, and compliance manually, is tedious and prone to errors. The NYGGS Financial Management Software for small businesses helps you to automate financial operations with accurate calculations. In addition, it helps in optimising costs through financial modelling and detailed reporting. Further, you can access accurate financial data through charts and graphs in the software dashboard. As a result, your confidence to make data-driven decisions and achieve your financial benchmarks.
Frequently Asked Questions
Q1. What is Financial Management Software?
Ans. Financial management software is a digital cloud-based solution that helps you to manage all your business finances from a single place. It automates financial administration tasks and calculations with a high rate of accuracy.
Q2. What are the features of a Financial Management System?
Ans. It offers a multitude of features such as:
- Finance and accounting process management
- Financial planning and forecasting
- Budget management
- Cash flow management
- Expenditure management
- Integration with other automation tools
- Financial data security
- Advanced reporting and analytics
Q3. Do I need accounting software with a Financial Management System?
Ans. Not at all, you do not need additional accounting software if you have financial management software in place.