Skip to 0 minutes and 4 seconds We’ve seen that cash is king when starting a business. Without good cash control, the fledgling business is likely to run out of cash and fail. However, it is not just during the business’ start-up phase that cash control is important. For an established business there are likely to be extra demands on cash compared with during the start-up phase. For example, the business may have to pay more for stock because of increased sales demand, buy new equipment, and expand into new offices, factories, or more warehouse space. New staff might be needed to fulfil demand for the business’ products and services. And their salaries and employment taxes will need to be paid by the business every month.
Skip to 0 minutes and 51 seconds The business will also have corporate taxes to pay regularly to the government and may have to pay regular interest amounts if it has borrowed money from a lender. You can see that managing the cash cycle we showed you earlier and planning for the future are equally important, and probably more complex, for an established business compared with a start-up. This will often require specialist expertise either from an accountant who is employed by the business or from an external business adviser who works with the business’ management. The accountant’s role will typically be much wider than just crunching the numbers on a spreadsheet to work out what the bank balance will be in three months time.
Skip to 1 minute and 37 seconds The finance team– or advisers who are part of the finance team– will certainly be involved in preparing monthly management accounts, maybe managing the relationship between the business and its stakeholders– the bank and any investors included. Credit control is absolutely of paramount importance. Without a good credit control function, yes a business might make sales and might issue sales invoices. But if that cash isn’t collected those sales invoices were worthless.
Skip to 2 minutes and 5 seconds Well first of all a bookkeeper was able to bring just a level of expertise and experience to things like management accounts and cash flow forecasts of the accounting elements of the business that would have been alien to myself or to anyone else in the business who just didn’t have that background or expertise. But as the business grew it needed more than that– it needed to think about the strategic direction, it needed to think about investment funding, the negotiation for that, planning for exit.
Skip to 2 minutes and 34 seconds And that needed the experiences of someone on another level, someone who had been there, done that, understood the options that the business had and could help with that financial planning, those financial forecasts– which were really the key to both the business plans and its future investments. So in summary, what the business needs is someone who can help the owner understand how to manage finance and cash.
The role of financial management
Good planning and effective cash control are essential for a new business if it is to survive without running out of money. The story doesn’t end there, however.
In this video business owners and entrepreneurs explain why careful management of the cash cycle remains essential for an established organisation.
The financial demands on an expanding business can become increasingly complex and challenging to manage. As the business people we interviewed explain, specialist expertise is essential for them to keep on top of these demands and plan for the future.
Remember that you can use the course glossary if you are unsure about any of the terms used in this video.
In the next step you can check your understanding of the key points we’ve covered so far this week. After the quiz there’ll also be an opportunity to learn more about some of the key skills which are important to all sorts of careers in finance, business and accountancy.
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