To startup a successful business and to build a startup successfully, sound financial management is essential. The comparison between target and actual values in the profit and loss statement shows you how much you deviate from the original planning in terms of sales and costs. Liquidity planning is about identifying bottlenecks early on.
Added to this is financial planning, which provides information on the need for further capital and is therefore important for longer-term financial management.
Aspects of good financial management
Especially after the foundation, good financial management is important for future economic success. In financial management, it is important to keep a close eye on the profit and loss account in order to be able to identify at an early stage a weaker sales trend and/or an expansive cost base. In addition to the income statement, you should not lose sight of your account balance for financial management – continuous liquidity planning is an important pillar for effective financial management. Then there is the longer-term financial planning. Financial planning is about quantifying the future financing needs needed for future growth.
1. P & L in financial management: compare target and actual
In your business plan, you have set important milestones and worked out a financial plan including a profit and loss statement. When implementing the business plan, you should now compare the actual profit and loss figures achieved with the profit and loss figures for sound financial management. The control of the profit and loss figures in financial management helps you to recognize deviations at an early stage in order to be able to counteract them if necessary. Financial management helps you to recognize signs of a corporate crisis at an early stage.
When reconciling the P & L budget figures with the P & L actual values, you should first compare the respective sales figures, but also not forget the cost side. If, according to financial management, If sales are below the P & L budget figures and are also below the budget, you can, for example, consider whether you no longer want to invest in marketing (building the best marketing strategies and its implementation) to promote your offer better.
We advise you in financial management to compare the monthly P & L values. However, it is important not to panic even if there are deviations from the profit and loss figures. Most business start-ups take 12 to 18 months to cover their costs. It is therefore important and correct to compare the P & L budget figures with the P & L actuals in financial management, but still, give the business model some time. In particular, the first 3 to 6 months give you a better sense of how your business model arrives and where there may still be room for improvement. As a result, you should generally not make far-reaching changes after just 1 to 3 months.
It is essential to perform the target / actual comparison
2. Liquidity planning in financial management
Sound liquidity planning is the key to successful start-ups – and thus also important for financial management. One of the most common reasons why the self-employed fail in the first few months is a lack of liquidity. Even if the company is doing well, there may be liquidity issues – maybe even because it’s going well. Therefore, liquidity planning is essential in your regular FM.
Many founders forget that investing first, e.g. into the warehouse, equipment, etc., leads to an accounting charge. The actual account credit for the service rendered then usually falls much later – often take 1 to 2 months, until your bills are paid. You have to finance this intermediate phase. You take this into account when planning your liquidity. There is also another liquidity trap in tax matters. You have to pay taxes at regular intervals (for example quarterly). Which leads to an accounting charge and must be taken into account in financial management.
Therefore, pay attention to liquidity, especially at the beginning of the business, and consistently implement liquidity planning in your FM. You can use our free financial plan tool that includes liquidity planning. We have compiled further important points on the topic of liquidity planning here.
The following chart shows why liquidity planning should be an integral part of your financial management.
3. Financial planning and financial management for the future
In addition to analyzing the latest figures, you should also look ahead in FM. Continuous planning helps you to be well prepared for the future. In future-oriented financial management, financial planning is important in addition to the income statement and liquidity planning.
You determine in detail the capital requirements that you will need in the future for company growth. In other words, investments or replacement investments should be taken into account in FM. Based on this, you then have to clarify the second question: how do you want to cover additional capital requirements? Different types of equity and debt are available, but special funding may be of interest and should be explored.