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Question of the month: Is using a process approach useful in improving the financial performance of a company?
The articles in February revolved around financial issues such as financial controls, working capital, return on investment and cash flows.
Discussions of improving processes are too commonly relegated to the production floor. Is it any less important for your office processes to function effectively and efficiently? How well does you company manage financial aspects like working capital, debt and investments, and leasing? These are just as vital to success as how efficiently production operates. Yet, few companies attempt to understand and improve finance processes to the same degree.
Meaningful Financial Controls For Positive Results
Do you know if you are making money on the cash you borrow? Or how about the assets you deploy like accounts receivable, inventory, or cash? What about the asset acquisitions you make? These are hard questions to ask for some but when it comes to business finance, these are the questions you should be asking – before you raise debt or equity capital.
Read more about financial controls and positive results;
Do You Have Enough Capital ?
Your capital needs are based on your revenue growth and your cash flow situation. Revenue growth comes from increasing the sales of your products or services, which in turn requires increases in expenses, assets, and working capital to fulfill those sales. This may seem obvious, but what is not so obvious is that there is a ceiling to this growth. Your growth is limited to your growth in equity.
Read more about capital needs and cash flows;
What Is Your Business’ Return On Investment ?
Returns are a function of risk; typically the higher the return the greater the risk. Thirty-year government bonds are low risk with returns in the 3-5% range. The overall stock market is more risky but produces an 8-13% return. Small or new businesses are considered the most risky, which is one reason why venture capitalists require average returns of 25-30%.
Read more about your business’ return on investment;
Putting Your Financial Resources To Work
Working capital is the money it takes to run your business on a daily, weekly, and monthly basis. It is the money used to pay your suppliers for materials and the money needed to pay for the goods and services (i.e. inventory and payroll) you have used while you wait for your customers to pay you.
Read more about working capital and financial resources;
Taking control of your financial processes increases the chances of your business’ success. Later this month, Bizmanualz will be releasing the Finance Policies, Procedures & Forms manual, introducing the concept of well-defined and controlled processes to Finance. It can be the first step in understanding your financial processes, and ensuring you receive maximum benefit from your financial resources.
On That Note
Answer to this month’s question:
Treating important company activities like finance from a process point of view is one method to realizing improved performance. When it comes to managing processes, finance is not that different than producing products and services. Productively using financial resources avoids undesirable results like big receivable/payable balances, low returns or unhealthy debt-equity ratios. Improved financial processes can result in effective financial controls and contribute to the company’s success.
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