Today, everyone is eager to enter the business world and become financially independent. Fortunately, starting a business has become easy in this smart world, but running it is not fun or a game. It requires a lot of effort, time, resources, and most importantly, money. Whether you’re recruiting people or marketing a business, entrepreneurs need considerable capital to run the show. Overseeing finances and assigning budgets to each department seems simple until this responsibility falls on your shoulders.
From financing routine expenses, buying equipment to paying dividends, effective financial management creates a roadmap to success. Therefore, the financial management of a company needs extra attention and vigilance. In addition to keeping records, you must calculate annual earnings, meet tax obligations, and manage expenses. At the same time, you must ensure compliance with regulatory bodies and accounting standards.
Sometimes companies also face liquidity problems and funding crises due to lack of cash availability. Since financial challenges are part of business, you need to learn to manage them instead of giving up. Understand potential pitfalls, business pain points, and manage finances carefully. If you don’t know the world of finance, take a look below. Here we are unfolding five financial management challenges.
1. REGULATORY COMPLIANCE OBLIGATIONS
Sometimes companies handle finances at their convenience. They record expenses whenever they want, combine business and personal income, and ignore reporting dates. Becoming an entrepreneur does not mean that you can follow their rules. In the world of finance, you must follow a set of accounting rules to keep your finances in order. Regulatory bodies have issued International Financial Reporting Standards (IFRS) to streamline the financial structure.
These international financial management protocols maintain decorum, ensuring that all companies are on the same page. It gives a standard structure to financial statements, where companies fill in all the details: sales, income, expenses, etc. Also, IFRS help with tax obligations. They describe the tax calculation procedure while explaining how to adjust tax deductibles on financial statements.
In addition, these standards ensure accuracy and relevance. For example, if you incurred a loss in 2014, you won’t add it to your 2020 financial statement. Similarly, if your financial report date is December 30, you should stick with it until your business exists.
2. FINANCING AND FUNDRAISING
Although entrepreneurs invest a lot of money as start-up capital, businesses need a continuous flow of funds to keep running. As a result, they consider borrowing from outside sources. Bank loans seem like a practical option, but spending money on interest with repayments is not a piece of cake. In addition to taking a sizeable chunk of the profits, it leaves companies at risk of bankruptcy.
Typically, companies determine their ability to pay by looking at future projections, but still do not account for uncertainties. For example, businesses that took out loans based on 2020 projections are about to close due to the economic downturn. Thus, the element of risk is always present in external financing. However, companies that are not willing to risk it all opt for an initial public offering (IPO). It means that they collect money in exchange for ownership of the company.
It is up to you how much ownership you are willing to share as it could be 2% or 20%. Wonder why people buy stocks? Since investors have a piece of ownership, they also have more of the company’s profits. Therefore, you must take out a portion of the profits and pay dividends to recoup your investment. And in the case of the profit dropdown, paying dividends becomes a major financial challenge because you won’t have enough money to incur future expenses.
3. LIQUIDITY OF THE COMPANY
Is your company always short of cash? Despite skyrocketing sales and profits, companies face daunting liquidity problems as current assets dwarf liabilities. In other words, the company is not liquid enough to pay its creditors and other accounts payable. The main cause of this problem is the excessive reliance on credit sales. It’s great to give customers some influence over payment terms, but not for the sake of your business profitability. Because if they don’t pay on time, the unavailability of funds can stop all business operations.
You cannot pay vendors, settle utility bills, or incur any other business expenses. At the same time, insufficient liquidity shapes weak financial performance, leaving the wrong impression on shareholders. Should your current ratio fall below 0.5, investors will start selling your shares. Therefore, companies need to address this issue as soon as possible. You can establish flexible payment terms with vendors, set a limit on credit sales, and use cash sales to subsidize everyday expenses.
4. INVESTMENT ACTIVITIES
Although running a business is all about taking risks, it’s never wise to put all your eggs in one basket. Instead of reinvesting all the profits in the business, the owners look for other lucrative opportunities. And these investment activities open the doors to more financial challenges and risks. You might think about going into the stock markets to invest in other companies. In addition to your company, you will need to keep track of the whereabouts of other companies.
Similarly, some entrepreneurs explore the financial stock market. Bonds, commercial paper, and Treasury bills can offer lucrative returns, but this industry is highly volatile and uncertain. In addition to this, investing in plant and machinery poses another financial challenge. You have to assess whether or not bringing in new machinery will increase profits. Feel free to perform a cost-benefit analysis to determine if the benefits outweigh the costs or not.
5. FINANCIAL REPORTS AND ANALYSIS
The business environment is complex, and calculating profit requires more than subtracting costs from sales. As a result, finance managers write financial statements to note all business details. The income statement provides an idea of rising raw material costs, expenses, and overall business profits. Similarly, balance sheets weigh liabilities against assets to assess the financial health of the company. A small error anywhere throws entire statements out of balance, requiring an audit.
In addition to drafting these statements, it is crucial to properly evaluate them. Financial analysis requires performance metrics: inventory turnover ratio, debt coverage ratio, solvency measures, etc. Analyzing these metrics requires an eye for detail and deep financial knowledge because there are no hard and fast rules. For some companies, a 10% profit rate may be too low, while companies with significant loans and a 10% profit reflect a positive image.
ENDING
Believe it or not, financial challenges are inevitable because businesses encounter money-related problems at some point. After all, dynamic and uncertain market conditions put a lot of pressure on financial systems. Managers have initiated cost reduction methods, report financial statements, assess liquidity, and hedge against solvency. Fortunately, one can combat all of these challenges with efficient management practices.
Categories: Technology
Source: SCHOOL TRANG DAI
