Finance management is the key to the survival of any business venture. Start a new business
is always a challenge. After establishing the company, you move on to the next phases – sustainability, profitability, and growth. The primary goal of any business venture is to make profits for its owners or shareholders. Over time owners seek more benefits and a sizeable increase in their return on investments.
You can achieve this through capacity building of your business. Persistent growth in the size of the market ensures that its bottom line keeps increasing. It is the best-case scenario for any company.
A business that is going through an expansion phase provides many growth opportunities. The company employees get ample compensation for their efforts in the form of increased pay and profits. Clients and customers get better services and value addition. It creates employment opportunities that eventually benefit the entire nation.
On the other hand, haphazard and disorganized business growth can be very disadvantageous. The company may become unmanageable in the long run as a result of this unbridled and unproductive growth.
Hence, it becomes necessary to incorporate comprehensive financial management in your business capacity plan.
Financial Management and Capacity Building
Financial management involves several activities, including :
- Arrangement of Capital
- Allocation of company’s resources
- Maximizing profits
- Analyzing the company’s financial results periodically
- Cash Management
There is a necessity for a finely thought-out and documented financial management strategy in every company. Such an approach should contain the company’s current financial position in terms of its assets and liabilities, as well as future profit projections.
Proper cash management is one of the most critical aspects of capacity building. It serves as a bridge between collections, operations, and investment activities, and serves as the backbone of an organization’s financial strength.
Cash management requires a cash flow statement which records inflows and outflows of cash. The cash flow statement’s residual value is the cash available with the company at any given time.
Capacity enhancement requires funding. The cash flow statement offers a clear status of the company’s cash, and how much you can channel from operational activities without impairing the ordinary course of business.
The unavailability of financial resources usually limits a company seeking to enhance its capacity. There are only two ways of financing growth. Either follow a long term approach and use portions of the company’s profits for building capacity. It is a gradual procedure and will take a lot of time.
The other option is to obtain funds from outside sources and invest those funds for building assets.
Sustained capacity enhancement puts pressure on the company’s available resources. Sometimes, the process takes more time than initially planned, adding further stress. It calls for a balanced and far-reaching financial management strategy. It should also take into account occasional instances when the business is short of cash during a seasonal lull in sales.
The Right Way of Capacity Building
There is no short cut for capacity building. Your business is operating in an unpredictable world. There are many instances when your plans could go wrong due to unforeseen reasons.
These are the very mishaps that your financial management strategy must address while planning for capacity building.
It is also where business analytics come into play. Most of the people are unaware of what is business analytics. This is a concept that requires a whole lot of business acumen and financial insight.
In the unpredictable world of business, analytics provide managers with the right tool for making informed projections.
In simple words, business analytics involves sorting and studying data of your business. Statistical models process this data to obtain valuable insights. Business analytics allows you to sort out useful data and increase efficiency and profits in the long run.
Developing Accurate Projections
The most important aspect of enhancing business capacity can arrive at near-accurate projections for income, cash flow, and balance sheet. Finance Management covers this area.
If your projections are accurate, they will enable you to decide whether your future profits are enough to undertake capacity building. Even if you need outside funding for financing your growth, you will still need these projections to submit to lending banks or financial institutions.
Projections get the development for any period ranging from one year to five years. Another advantage of developing financial projections is that it allows you to balance your costs and revenues.
Arriving at a realistic Profit Margin
The difference between costs and revenues is your company’s profit margin. If you have a long-term growth plan, you must be able to foresee your future profit margin and lay your plans accordingly.
If your one-year profit margin shows a business loss, you will have to forget about capacity building, and concentrate on your current operations. Conversely, if they show profits in the coming years, you may set aside some of it to finance growth and expansion.
Keeping an Eye on Costs
The sales of your business may be skyrocketing, yet if your costs are high, there will be very little profit available for expansion.
Financial management would allow you to carry out a complete analysis of your costs. It will help control costs in such a manner that you continue to make modest profits through your business operations.
Managing Accounts Receivables and Non-Performing Loans (NPLs)
Every sale does not require cash receipts. It is a standard market practice to sell products against accounts receivable or extend credit lines to customers. These have maturity dates. When these instruments get matured, the customer is supposed to pay you in cash.
Financial management allows you to manage these credit instruments effectively so that the business is never short of cash. The company always has an up-to-date list of non-performing loans that are shareable with the recovery department for follow-ups.
Capacity enhancement is a broad term that includes anything from bringing improvement in your workers’ technical skills, to building your organization’s infrastructure.
The main objective of capacity building is to bring more efficiency into your business operations.
The main hurdle encountered during capacity enhancement is the want of cash. Financial management is a tool that provides you with the required funds. It also provides you with the knowledge regarding whether you will be able to sustain growth in the future.
Indeed, growth and capacity building without proper financial management will always remain distant dreams.