The importance of financial management for a business

As a solopreneur, the financial management of an organisation will be your responsibility and it is an area that will need time and attention.

Firstly, the solopreneur decides to reflect on their sales strategy. Does the customer see them as a low-cost budget product/service? This will be reflected on how and where the product/service is sold AND also in the financial strategy for their business.

 

 
The role of financial management can be divided into three main areas:
  1. Financing decision - What are your sources of finance? These lenders/stakeholders may have specific requirements for you and your business. Perhaps, they will require you to report back to them with Key Performance Indicators (KPIs). You might have to set aside some of your profits to ensure repayments are made. You will also need to ask yourself why they invested in your business and ensure that you meet their expectations.

  2.  The Investment Decision – The next major financial management decision that the solopreneur needs to consider is the type of projects to invest it. What level of equipment (e.g. computer equipment) is desirable and what is affordable? Quite often this is connected to the financing decision. A solopreneur might decide to lease a premises and equipment as it is a more affordable option when starting out in business.

  3.  The Distribution Decision – Hopefully, once income is being earned and the business starts to generate profits, the solopreneur will have to decide whether to invest those profits back into the business or withdraw them from the company. It is quite common for a solopreneur to invest the profits back into the business in the early stages of establishment. This will allow the business to grow and seize opportunities that may arise. The solopreneur will need to ensure that they are not being a “busy fool” either! Financial management will help them ensure that the business is viable and worth their investment of both time and money.

EXAMPLES/CASES

Here is an example of a solopreneur who despite making significant profits, has limited his own salary from the business:

TIPS

Many government agencies will offer funding for a feasibility study. This gives the solopreneur the opportunity to assess all the costs of going into business. If you have not completed a feasibility study, you can still prepare a cashflow forecast. Not only is this useful for you, but it will also be a useful document for your bank or lending providers.
MyVA Project number: 2020-1-SE01-KA226-VET-092491
This project has been funded with support from the European Commission. 
The European Commission's support for the production of this publication does not constitute an endorsement of the contents, which reflect the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.
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