5 tips for simple financial management.

These tips will help you stay on top of your business finances. When your finances are managed well you feel in control and are able to make good, timely decisions to advance your business. Many businesses do the basics - the essential administration, but don't go that bit further to 'manage' their finances proactively.

1 Set a long term goal

There is a quote attributed to Lewis Carol and George Harrison, 'If you don't know where you're going, any road will take you there'. Having a long term goal gives a clear direction to your financial plan. It's a good idea to link your long term goal to exiting from your business some time in the future. So it could be, 'in 10 years I need £1m in a pension pot so that I can be financially secure in retirement'. Your plans and actions in your business then work towards this long term goal.

2 Set short term targets

Once you have your long term goal you can work back from this to set shorter term targets. If you need your business to be worth £1m in 10 years you can look at the value now and work out the annual growth rate required to achieve your goal. It's sensible for a small business to have a detailed financial target for at least 12 months ahead, broken down into revenues and costs.

3 Measure

So you have your detailed 12 month target. Now you need to measure how you are performing against this on a monthly basis. Idealy you should have a set routine of preparing your monthly accounts say by the second Friday of the following month and sticking to this. Your accounts should include an accurate profit & loss, balance sheet and debtor and creditor reports. As far as possible your monthly accounts should be prepared on a similar basis to your annual accounts so that there are no nasty surprises which pop out of the woodwork at the year end.

4 Take action

The most important bit. If your monthly figures are falling short of your plan you need to take action! Modify your products, change your pricing, listen more to your customers, cut those unnecessary costs. Whatever it takes, but you need to get your financial performance back on track. This is where the 'management' part of financial management comes in. If you just look at the figures and carry on as you were, there's no point.

5 Forecast

To complement your target and your measurement you need to forecast regularly. A rolling 12 month forecast for most small business should be a minimum. This should be a detailed forecast of revenues and costs - for businesses with tight cash balances a short term cashflow forecast is also recommended. Armed with your forecast, you can anticipate problems and opportunities in advance. 'If we carry on as we are now, in 12 months we are going to be £30k below our target. ' Ok, so what are you going to do about it? Having a forecast gives you the information to address a potential issue before it's too late. It is an essential tool.

So that's it. Good financial management in a nutshell. If you do all these things it will not guarantee you business success. It will mean that you are in the driving seat and can take control. The decisions you make, based on your financial reporting will determine how you get on. 

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