Why Financial Management Is Important In Business

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The article shows you why financial management is important in business:

  • Type of businesses
  • Incorporation of companies
  • Management Policies
  • Personnel Management.
  • Financial Management.
  • Marketing Management.
  • Accounting
  • The crash of the companies
  • Lessons to learn from the story

There are many reasons why sound financial management is key to success in business.

On the other hand poor business management has long been known as one of the major causes of business failures globally.

Ability to identify a viable business opportunities is a rare quality some entrepreneurs do not possess. A lot more people are not so gifted

Having said that, whichever side of the divide you find yourself, you must have the ability to formulate and implement effective financial management policies in your business.

This article shows you a true life story of how poor financial management led to the failure of a group of companies.

Type of businesses

The companies that made up the group were founded by a business mogul Chief  Jerry.

The chief has an uncommon wisdom of being able to spot viable business opportunities.

For example, he has business interests in the following choice industries:

  • Aviation,
  • Transportation,
  • Manufacturing,
  • Brewery,
  • Education,
  • Estate development and tourism

Incorporation of the companies

All  the companies were duly registered with Corporate Affairs Commission as private limited liability companies.

The chief was the CEO/Managing Director of all the companies.

However, the chief met the requirements of the Companies Act which allowed a minimum of two directors to form a private limited liability company.

His son was a director in all the companies. But he had little or no power to make decisions.

Financial management: Policies

Poor financial management was responsible for the poor performance of all the companies.

For example, the chief:

  • made all the financial decisions.
  • never sought the suggestion or opinions of his senior employees.

Similarly, he never sought help from financial management experts to find the best solutions to his financial problems.

Financial management: personnel 

His poor financial management style also negatively affected the performance of his employees.

Examples of how poor financial management impacted on his employees included:

  • There was no job security
  • Employees never took annual vacations.
  • There were no promotions
  • No pay raises for deserving employees
  • Workers were owed several months of unpaid salaries
  • Employees were paid salaries that were far less than what they were worth.
  • Towards the end of each month, the chief would travel outside the country; just to delay payment of salaries.

The chief did not believe in motivating his employees.

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Financial management: Finance 

Poor financial management also affected how the finances of the companies were managed.

For example, the chief would simply:

  • walk into any of the companies and collect cash from the cashier.
  • spend business money freely from daily sales
  • instructed the cashier not to pay money into the bank without his approval.

Moreover, the chief had exceptional skills in getting loans and overdrafts from the banks.

Unfortunately, the chief was very fast in spending monies he borrowed from the banks.

But he was not as fast in paying back loans or overdrafts.

Furthermore, he forgot that “always taking out without putting back soon empties the biggest sack”.

Consequently, both the banks and other lenders lost trust in him.

Financial management: Marketing 

His poor financial  management also adversely affected the marketing campaigns of the companies.

The reason was that the chief did not believe that ads can drive sales.

Moreover, he assumed that customers will come on their own to buy.

Furthermore, on one occasion he sacked a marketing manager who suggested that the companies should advertise their products on local radio stations.

Consequently, he believed that money spent on adverts is money wasted.

Most importantly, he forgot that it takes money to make money.

Accounting 

The chief did not believe in keeping records of his business transactions.

This is because the  chief never see any wisdom in keeping accounting books and records.

As a result, the accounting books only contained scanty information.

In the same vein, the balances in all the various bank statements were in red.

Consequently, none of his businesses prepared:

  • Bank reconciliation statements
  • Annual financial statements
  • Or file tax returns.

It was, therefore, very difficult for anyone to say whether or not the companies made profits.

The collapse of the companies 

Poor financial management resulted in the businesses going under.

For example, some of the consequences were as follows:

  • Employees were no longer sure that they would keep their jobs
  • Many of good employees left to look for better jobs elsewhere
  • They spread negative news about the companies.
  • Existing customer began to leave
  • The quality of customer service started to drop
  • There no profits to report
  • Older companies were folding up as fast as new ones were registered
  • Banks and other lenders came calling for their money.
  • Some of the banks went to court seeking court order to hold on to the collateral submitted by the chief.
  • Annual tax returns were not filed by any of the companies in the group.
  • Year in year out, the chief found himself in running battles with the relevant tax authorities.

Lessons to learn from  the story

Your takeaway from the above story are that:

  • You can give your senior members of your staff free hands to put in their skills to work for you.
  • Assign duties to your employees
  • Give them authority to make certain decisions
  • You need to free up time  to enable you to concentrate on planning ans administration.
  • Hold regular meetings with your senior employees
  • Some of them might have great ideas that could move your business forward.
  • Do not spend business finances on things that do not add value to your business
  • You can see yourself as an “employee” rather than the boss
  • Do not be too bossy; otherwise, you risk not getting useful info from your employees
  • Pay your employees salaries according to the work they do, their skill and experience.
  • You and your employees should work as a team

Related:13 Most Important Entrepreneurial Skills You Need To Succeed In Business

 

By Samuel Ijenhi

B. Sc. Accounting [University of Benin]

Benin City, Nigeria

info@samuelijenhi.com.ng

About Samuel Ijenhi

A graduate in Accounting, University of Benin, Benin City, Edo State, Nigeria.
View all posts by Samuel Ijenhi →