Small Business Finance Management

Most small businesses are stuck doing just basic bookkeeping and not doing real financial management. This can contribute immensely to the stunting business growth and preventing the company from achieving higher profitability.

Small business financial management goes way beyond just accounting. Accounting or bookkeeping is simply capturing and reporting transactions through financial statements. This pretty much sums up financial management for small businesses.

Financial management starts with your accounting and financial statements, but is focused on planning for the future. This is important, since financial information should not be used solely to look back on what happened in the past, but to analyze and plan for what you should do over the next year. Larger companies, unlike small businesses, spend a lot of time on planning. Larger companies analyze and use financial information to make long term decisions about the business.

To better understand the differences, let’s contrast Accounting, which almost every small business does, with Finance, which is what almost every larger company does:

Accounting (Small Business)	Finance (Large Business)
Inputs = Transactions for the period are posted by the Bookkeeper or Accountant	Inputs = Financial statements and financial information are used to plan for the future
Output = Financial Statements that report what took place in the past	Output = Financial forecast, budgets, plans and analysis are used to make future decisions
Focus = Short Term, looks back	Focus = Looks ahead to the future
Advocates Profits	Advocates Value
Must follow rules for compliance	Less rules and more specific to the business
Measures historical values only	Measures future and present values

Because finance has few rules and is much more analytical than accounting, finance requires a higher set of skills that most small businesses currently lack. It is also important to note that the world of finance has opened up for small business. In today’s world of business finance, a small private company has much more access to capital. Examples include Crowdfunding for start-up ideas, equity investors who lend money under more flexible terms than banks, and new relaxed rules allowing private companies to issue stock under Direct Public Offerings (DPO).

Because the world of finance is now much more sophisticated and open to all types of businesses, it is increasingly important for small business owners to also get sophisticated when it comes to finance. Taking these important first steps towards real finance is not difficult. There are plenty of financial professionals that can mature the financial practices of small private companies.

All businesses, regardless of size should not do just accounting, but move from accounting to finance. If you want to become a bigger company, you should act and behave like a big company. This will require a strong commitment to real financial management.