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Why financial prudence is vital for business success

Financial prudence is a key aspect of successful businesses. If you are starting out it is wise to have a set plan and system for your finances – and more importantly to know about financial management and its workings. New and even well established businesses find that managing expenses and maintaining a sound balance sheet are pivotal when it comes to good money management. It would be a shame for a company with healthy turnovers and profit margins to go under due to poor financial management.

This article discusses four guidelines for financial prudence and highlights the importance of them:

  • As a business owner one of the first things when starting out is to make sure that your personal wealth is not mingled with the business. Not putting all your eggs into one basket will help cushion you if your venture does not succeed as expected – and risk is always a reality of business that must be factored in. This is no deterrent though for fearless, trailblazing entrepreneurs.
  • In the same breath having funds for an emergency and/or for ‘rainy days’ is a good contingency to have in place. Business operations need capital just as a car needs fuel to operate productively. But while a fuel budget helps most of the time, greater spending is called for when there is an unexpected mechanical failure or accident. Similarly, having a good reserve or cushion will ease the normal processes and should business circumstances unexpectedly turn south, the extra finances will serve as a buffer to the negative effects. This may even help the business avert closure. Even if it means cutting on some avoidable costs and reducing entrepreneur drawings for a season, that’s what should be done in the long term interest of a profitable and resilient operation.
  • Tax planning is a very important step. Tax authorities emphasise the importance of creating a plan that takes into account prospective benefits, such as rebates. This knowledge also helps you determine when and how to effectively spend or allocate your finances. The idea is to consult with a good tax specialist and preferably gain knowledge on relevant laws, while setting aside a tax reserve for when it becomes due. Failure to plan properly for taxes and maximise deductions will harm the bottom line of a business and such poor planning must be avoided for the business and cash flow betterment.
  • Insurance with appropriate cover is essential for a business and business owner. There are many factors beyond our control, which if not mitigated against can be disastrous, especially for small businesses. Therefore, having a professional to assess your and your business’ risks – and advise on a suitable policy or relevant quotes to cover against fire, theft, loss of profit, sasria, personal risks like disability, dreaded disease and so forth – will prove invaluable. Marguerita Cheng, chief executive of Blue Ocean Global Wealth, expresses the importance of personal cover such as disability saying about owners that, ‘Disability insurance is one of the most important (though often neglected) forms of insurance for business owners. Disability insurance protects your greatest asset: your ability to make income. If you are the sole breadwinner, that is really important.’

This article looks at four vital areas that need to be considered when it comes to being prudent and implementing an effective financial management system. As a small business it is especially important to start off on the right footing. Look out for follow up articles on financial management and more great business tips.

Proudly brought to you by the National Small Business Chamber (NSBC).

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