The Importance of Financial Management for Middle Market Companies

Posted on: September 5th, 2019

No business can exist without a business plan and a solid financial management plan — it doesn’t matter how good of a product you have or how innovative of a service you offer. Understanding the importance of a positive cash flow, budgeting properly, responsible allocation of funds, and creating safeguards and monitoring systems are the tip of the iceberg for managing finances for any successful middle market business.

Business owners and leaders need to make sure they have, at the least, basic financial management skills. Otherwise, they must be willing to reach out to consultants or hire an expert in the area. This does require a certain level of self-awareness – knowing what you don’t know, as the adage goes – which is one of the reasons not everyone succeeds as a business owner.

But above all else, it’s important to understand that without a financial management plan, even with every other advantage, your business will likely fail.  This is especially true with fast growing companies, who often lose track of the critical financial metrics during their growth phase. It is very easy for fast growing companies to become illiquid as their spending rate increases and their working capital becomes stretched.

What is Financial Management?

Financial management is set of processes and functions used to manage the financial affairs of a middle market business. It includes all basic financial functions such as accounting and bookkeeping. It also includes advanced functions such as capital allocation, financial reporting and financial performance budgeting. Strong financial management is keystone characteristic for middle market companies seeking to grow. It helps chart the course, drive the execution and measure the performance. Financial management is a strategic activity and can deliver enterprise-wide value over the lifecycle of middle market growth.

Managing Your Expenses

When considering your financial management plan, one of the first questions you need to ask yourself is this: How much are you spending on a monthly basis? Strong budget measurement and control is needed for middle market companies to be successful.

As a business matures, and spending authority rests in someone other than the owner, it’s easy for business owners to lose track of spending. With timely budget reporting, a middle market company can instantly identify which accounts are over budget.

Be aware of where your money is going and be strategic about expense management. The larger a business gets and the more varied its revenue stream, the more opportunity there is for inefficiencies to siphon away money. Some expense areas drive innovation and growth so it’s important to differentiate between expense categories and invest in areas that will provide long term returns.

Stick to Your Objective

Financial management has an eye to the future of your business and is linked, but altogether different, from corporate financial management. The interest of shareholders and investors should never work counter to the goals and objectives of your business, but very often will be at odds with the long-term growth and success of your business.

It’s important to understand that all opportunities are not created equal. Capital planning exercises are important to properly assigning cost parameters for each strategic initiative. Some are straightforward to calculate, yet others more nuanced. The key to capital planning is to ensure that you have enough capital on hand to fund the day to day business and your growth initiatives. In the end, you must be mindful of competing objectives and have a plan in place that allows you ensures future growth without being completely dismissive of more short-term objectives.

Ensure Capital Adequacy

At certain junctures, you might need to acquire more funds to propel growth in your business. Before pulling the trigger on any loans or credit, do your research. Not all loans are created equal and lenders have different personalities. You want to ensure that you are getting a financing partner that will offer your business a balanced financing arrangement. This includes the right quantum of capital, the right term for repayment and the proper level of loan flexibility.

Many middle market businesses often overlook this and end up selecting a loan solely based on the pricing. This can put them in a difficult spot down the road, particularly if it takes them longer to scale. The selection of the right lender is one of the more important decisions you will make. They are a critical long-term vendor to your business with the power to elevate, as well as the power to control your growth. Given this, it pays bring on the services of an expert who can help you make the wise choice.

Hire the Right Help

Entrepreneurs tend to be big picture visionaries with a genius for addressing a market need with an innovative product. They tend not to be very good financial managers.
Smart entrepreneurs realize the need for a savvy financial manager early in the growth cycle of their enterprise. Smart growth companies have two levels of financial management in the organization –

1. An accounting function which controls cash, closes the books and reports the actual results.

2. A financial analysis function which analyzes the results, provides management reporting, and provides strategic analysis.

Even if you’ve built a strong team comprised of both accounting and financial analysis professionals, it does help to use expert financial consultants to provide an independent perspective on the business.

Financial Management and Company Culture

Words like “budget” and “control” have a negative connotation on an individual level. Department heads and leaders very rarely like to hear that funding is capped or cut for their team for the benefit of the entire business. But a smart company-wide financial management strategy that gets everyone bought into the financial management culture can create a unifying force within the company. By empowering individuals and departments with their own financial management goals, you can create an entrepreneurial mindset at every level of the company. When employees are incentivized to be financially minded, you get switched on employees motivated to find the best financial solution.