Expanding businesses often credit a successful product or innovative service for their success. Few managers will credit strong financial management tools for delivering growth. Yet, solid financial management tools often provide the value-creating edge that businesses rely on — from making smarter spending, investment and expansion decisions to anticipating cash needs. These tools add value to your company in the form of buttoned-down financial analysis and projections that can help you achieve your short- and long-term objectives.
Financial Management Tools Check List
Effective financial management systems allow you to monitor many facets of the business, from payables to receivables as well as investments made with excess capital. These tools can help accelerate collection of receivables (improving cash flow) and assist you in using existing cash flow to pay suppliers. Your company can impress lenders, business partners or a potential acquirer with five important sets of financial management tools that help strengthen and make your financial processes more efficient.
Toolset #1: Reporting/Analytics
The analytic tools your company uses to track data and distill it into financial Key Performance Indicators (KPIs) are of primary importance. In recent years, companies have witnessed an explosion of data spanning markets, customers, operations and detailed financial transactions. The strategic importance of putting this data to work, producing reports and then being able to articulate the implications of those detailed snapshots on your company's bottom line and communicate them across the organization are the true tests of financial sophistication.
- Turnkey banking products provide robust support for reporting and analytics with online information reporting tools, most including instant access to detailed information on daily financial transactions across multiple platforms. From simple online banking to more integrated treasury management systems that provide customized reporting and transaction detail, your bank can provide a host of reporting and analytic systems to support your specific needs.
- Automated reporting and business intelligence systems assimilate information from disparate systems into an integrated real-time view of financial and business processes. Often using Enterprise Resource Planning (ERP) systems as a backbone, these systems can be customized to your business specifications, consolidating any element of financial and management accounting (general ledger, payables, receivables, budgeting by profit centers, etc.), human resources (payroll, recruiting, 401K), manufacturing (inventory, work flow management, cost control) and Customer Relationship Management (CRM) data. Business intelligence features, such as dashboards that graphically display specific KPIs at a glance, can also be programmed to improve decision making and provide data on the fly. This automated reporting enables the management and finance teams to spend less time on the details of core business process reporting and more time evaluating opportunities.
- Continuous budgeting allows companies to make decisions based on real data and current market conditions with up-to-date assumptions. Business intelligence and ERP systems themselves can assist in providing the data necessary to transition from annual to planned monthly or quarterly budgeting.
- Break-even analysis indicates the level of sales your company needs to fulfill obligations and sustain operations. More advanced planning techniques apply break-even analysis to scenarios that game different levels of external conditions (raw materials cost, labor costs, economic conditions, etc.) and business strategies for your company.
- Audited statements provide an objective third-party assessment of financial statements as well as an added level of confidence and credibility in company financial statements.
- Inventory management systems help keep inventory levels in check, reduce carrying costs and pinpoint obsolete items in need of liquidation.
- External industry analysis for your industry segment or marketplace helps you understand the future of the industry, emerging competitive issues and top groups with whom to benchmark and share data.
Toolset #2: Cash Management
Cash flow is cited as one of the top five factors driving business strength for small and medium-sized companies. Strong cash management capabilities reflect a financial team's understanding of the forces that move cash through an organization and the levers that they can use to match cash needs with business conditions and operating needs. Visibility into cash flow, control over its movement and predictability over its levels are minimal expectations for all except early-stage companies. While there are a host of modeling and reporting solutions, several useful tools are available to help your company maximize its cash on hand and demonstrate financial knowledge.
- Turnkey banking products easily enhance cash position management. Products like zero balance accounts automatically pool funds into a single account at the end of each day, reducing idle cash and allowing for easy transfer into overnight investment vehicles or controlled disbursement systems. Combining funds into a single account provides early, same-day reporting of all checks presented for payment so that your finance department knows exactly how much money to transfer to the disbursement account, avoiding overdrafts and allowing investment of any excess funds.
- Implementation of a Chief Financial Officer-Chief Risk Officer partnership brings a more effective, integrated approach to risk management. A close partnership between finance and risk helps steer the business to achieve better risk-adjusted returns and more alignment of strategic goals — leading to actions, such as the elimination of high risk business practices or even exit from a high-risk business. Working together, CFOs and CROs can also more effectively manage redeployment of resources to exploit new opportunities of growth and sustain improved profitability.
- Advanced cash planning positions your company for better rates and opportunity for your future needs. Two-thirds of businesses evaluate finance options 12 to 18 months in advance. Forecasting expectations of when the business will need cash in the future, then negotiating in advance will achieve more favorable rates for future expansion or cash needs.
Toolset #3: Accelerated Receivables
One of the ways that companies can maintain a steady stream of working capital is to improve the performance of their collections and receivables. Days Sales Outstanding (DSO) is an important metric for increasing overall efficiency in a company's cash conversion cycle because it measures the receivables process over time, identifying areas for improvement across the organization. Processes that improve DSO ultimately improve cash flow, a prime indicator of financial stability to your organization, investors and lenders. A total picture of receivables velocity can help determine cash flow needs and possible financing options.
- Turnkey banking products accelerate your company's accounts receivable (AR) functions through systems such as Automated Clearing House (ACH) debiting which speeds up collections or e-commerce that allows acceptance of virtually any payment type, making it simpler for your customers to purchase your products and services. Adding a cost-effective alternative to processing high-dollar checks in-house and manually such as a wholesale lockbox provides faster access to funds and streamlines your collections process.
- Automated account receivables functions, through a CRM or ERP system, organize invoicing and improve accuracy. Automated AR helps eliminate mistakes and ensures all information is accurately attached to invoicing, including PO numbers (which is one of the most common causes of delayed payment.)
- Enforced payment policies accelerate receivables through pre-negotiated terms that assess interest and late payment penalties on a consistent basis. Involving and educating your sales force on the necessity of imposing a consistent and fair policy will help support your terms and politely send a message to your customers that delayed payment is not an option.
- Credit rating segmentation by placing customers into categories based on payment history. Assign different terms for each segment, with more attractive options for quick-paying customers and incentives to improve slower payers.
- Accelerated invoicing to start the payment process moving earlier. Point of service invoicing, electronic email/messaged invoices, sales contract-triggered invoices and online bill presentment are all ways to get the invoice to the customer faster to start the payment cycle sooner.
- Outsourced billing services reduce your company's operating expenses while achieving higher collections rates and generating better cash flow through turn-key paper and online bill delivery and payment services.
Toolset #4: Controlled Payables
Your Accounts Payable (AP) department can affect your company's cash flow and bottom line profitability while serving as a key indicator of how well you marshal cash. AP management efforts include electronic funds management, shifting payment terms and vendor relationship management. Smart management of how and when invoices are paid allows the finance team to better predict cash availability and adjust capital needs accordingly.
- Turnkey banking products provide efficiency and streamlined processes through ACH payments which cost less to process than checks and provide increased payment flexibility by controlling when the electronic payment is made, thus providing better predictions of cash availability. Integrated payment processing systems are available that combine all payables onto a single platform, providing a single payment stream to manage and streamline.
- Improve Days Payable Outstanding (DPO) by ensuring the correct personnel, with appropriate knowledge and external/internal data, negotiate with vendors and sets payables terms and goals. Creating a strong partnership between finance and purchasing to give your employees a stronger incentive to negotiate for the best terms, analyzing terms for your high frequency vendors as well as dividing vendors into categories to create specific payables goals for each can also promote accelerated DPO.
- Automated payables make the AP function much more efficient and predictable by lowering invoice processing costs and reducing expense posting cycle times. Moving toward a paperless processing environment by automating functions such as invoice scanning, electronic invoicing, payment and approvals, plus automatic PO generation can improve overall payables and procurement performance.
- Electronic payments can reduce processing time and streamline reporting with real-time access to consolidated payment data, overall spending and invoice level data with each payment. Paying vendors and suppliers electronically can also improve process efficiency by eliminating or reducing paper based checks as payments and improve vendor/supplier payment timeliness and accuracy, thus reducing costs associated with payment errors and late payments.
Toolset #5: Manage Expenses
Even the most disciplined company can find itself challenged by expense management, particularly with the complexity of adding multiple locations, expanding its employee base or investing in substantial upfront development or manufacturing setup costs. One in five businesses cite controlling operating costs as the greatest factor driving business strength. These companies understand that aggressively managing indirect and services spend can significantly increase savings on a large portion of their variable monthly expenses. Reducing expenses is one of the top three goals for businesses, and a further 30 percent of companies plan to use the cost reduction savings to finance their future growth strategies. Organizations that continuously evaluate every process and interaction can achieve greater efficiency and lower costs.
- Turnkey banking products that help you manage expenses like commercial credit cards, purchasing cards, and integrated spending platforms, all control, amalgamate and streamline company-wide expenses while reducing costs and uncovering opportunities to improve efficiency and generate savings.
- Spend optimization creates a culture around expense management with a focus on cost efficiency and accountability across the business. This may include elevating the procurement department to a strategic position in the company structure, which allows the team to creatively consolidate procurement efforts, collapsing and aggregating purchasing across business lines and/or facilities.
- Strategic outsourcing allows your business to stick to core competencies by outsourcing functions that are not directly focused on your bottom line. Advances in cloud technology and the proliferation of Software-as-a-Service (SaaS) vendor systems now provide more cost-effective solutions to small and mid-sized companies looking to outsource HR, PR, Legal and Payroll functions.
- Procurement outsourcing consolidates procurement processes based on category (IT, HR, marketing, etc.), project or outside vendor to realize economies of scale and reduced internal personnel costs.
- Vendor management through negotiation of better pricing, longer payment terms and invoice discounting helps keep costs under control while meeting pre-assigned business requirements. Promoting competition between vendors, building preferred vendor relationships based on volume and pricing and requiring employees to visit only those preferred vendors all assist in management of expenses.
- Improved employee financial literacy lifts the overall business to a more fiscally-focused enterprise. Sharing financial information, processes and policies outside the "C-suite" provides more buy in and knowledge. That might include exposing the sales teams to scenario planning around sales margins and revenue levels needed to break even. It could involve the facilities management team in capital planning exercises illustrating that suggested infrastructure improvements will have to wait until cash flow strengthens. A financial education program could link employee-controlled expenses related to service quality, absenteeism and health care costs to the company's overall finances and profitability.
Add value to your business with financial management tools
Your financial "resume" and the level of financial management sophistication your company displays bear directly on its value as measured by investors, lenders, appraiser and purchasers. Anyone evaluating your business will want to see your financial systems, understand the accuracy of your projections, assess your leadership's understanding of the company's financial drivers and judge their appreciation of business risk. Installing a set of financial management tools not only helps you manage your business and put your resources — cash, labor and more — to the best use, they also telegraph your level of financial competence to external players.