When it comes to running a business or even a nonprofit organization, you need to understand the importance of financial management. After all, if your finances are not in order, your financial health and long-term viability as an organization will suffer. Whether it’s paying off credit cards or maintaining sufficient cash at the end of the month, you must have enough money to make payments and meet your responsibilities.

Successful organizations know that controlling costs and managing risk comes down to how well they manage their finances and financial policies. If you want to make sure that you take the right actions to help your organization grow, you have to have a clear financial plan and financial goals. The following principles of financial management will enable your business or organization to thrive and move forward with purpose. 

1. Organize Your Finances

One of the most basic principles of financial management that you need to master is to get your finances organized. Only when your finances are in order, free of clutter and distractions, can you expect to proceed with procurement and the acquisition of supplies. In fact, it is necessary for obtaining a lease agreement and other types of agreements and to prepare for an audit.

By organizing finances, both your personal and professional accounts, you establish the foundation for creating wealth. This is why you will have to track everything, including car loans, mortgages, brokerage accounts, personal loans, bank accounts, credit cards, and retirement accounts. You should be able to use budgeting software to track these accounts and make payments on time so you can avoid late penalties. Besides, the federal government advises businesses to account for everything, even indirect costs. This allows you to accurately prove how much you earn from your business.

If you don’t have much experience organizing finances, you should educate yourself with a range of resources along with taking basic or in-depth courses on the subject to achieve your ultimate goal. Most of the tools available today provide access to insights and research that can help you move in the right direction. You should read financial blogs, books, and periodicals to stay updated and to continuously educate yourself. The last thing you want is to make mistakes you could have avoided. 

2. Spend Less than You Make

When you start a business, it’s pretty easy to go overboard. Similarly, individuals need to spend less than they earn in order to control their debt-to-income ratio. Even if you want to spend more on your investments, you still need to think things through. Otherwise, you could overspend and force yourself to borrow additional funds through a loan or other means. 

Once again, you should be able to use financial software to keep track of spending and budgeting. It will allow you to meet your long-term goals. By learning how to monitor finances and understanding where most of your money is going, you’ll be able to establish control over your finances. It is one of the secrets to strong business performance. Luckily, you don’t need an accounting degree to know when you are spending more than you are earning. When you overcome debt or avoid it altogether, you decrease your liabilities and increase your ability to expand.

In addition to controlling your spending, you have to limit debt to income-producing assets. When you have car loans and credit cards to pay off, you will have less money for your goals. You need to understand that only a few car models don’t depreciate to zero. On top of this, you have to pay for repairs and high-interest rates. Therefore, you should consider whether you even need to purchase things that are not an absolute must. If you want to take on debt, it should only be for financing items that actually retain their value with time, such as education, real estate, business equipment and technology, and talent. 

3. Make Your Money Work

If there is one basic principle of financial management that you need to master, it is to make your money work for you. This is where the concept of the time value of money comes into place. If you invest today, you can expect a greater return if you plan with wisdom and the right research. Whether you want to invest in entities, stocks, or a savings plan, the earlier you begin, the better.

Consider diversification to ensure that you don’t expose your portfolio to excessive risk. Qualified financial planners are good for this. Make sure you regularly invest your money so that you get something in return and take prompt corrective actions to shift your investments toward more advantageous avenues when current results aren’t meeting your strategic goals.

Since money loses value over time because of inflation, you cannot simply wait around and let assets collect dust. Instead, consider new places to invest, real estate opportunities, and remote contract work. Offer outside consultation services to businesses or non-profit organizations. Develop new products and services to introduce to the market. Invest in a franchise or another company, and consider expanding current systems to increase profit over time.

Remember, when speaking of diversification, you should know that it isn’t only reserved for investment. You should find ways to get more out of your income. We all have talent and special skills that can provide money-making opportunities. Earning some extra income can help you with financial management and enable you to lead a better life.

4. Understand Risk

Everything comes with risk in life. Generally, the more risky something is the higher the return should be. It is known as the risk-return trade-off. Investing in bonds and stocks comes with a higher rate of return because there is more risk involved, along with the possibility of you losing your principal.

On the other hand, investments like money market accounts and certificates of deposit come with a lower rate of return, but they hold a lower level of risk. However, you still need to understand that no investment comes with zero risk. As long as you manage your portfolio well, don’t place all your eggs in the same basket, and make the most of wise financial advice from qualified investors and professionals, you should be good to go.

5. Maximize Employment Benefits

If you are working a regular job, it is a good idea to cash in on employment benefits. You should definitely get medical and dental insurance, consider flexible spending accounts, and take a serious look at a 401(k) plan. The reason why you need to set money aside for employee benefits is that they are tax deductible and a great way to protect you and your family. This means that you actually end up saving money when you get them, while providing for your family’s health and wellness. It is crucial that you invest in your future. It will ensure you improve your overall financial and personal well-being. 

6. Pay Attention to Taxes

The next basic principle of financial management that you need to know about is paying attention to taxes. Managing taxes accurately allows you to avoid penalties and to benefit from tax credits, while applying adequate safeguards to your compliance practices. You might not realize it now, but taxes can eat away at your earnings.

If you fail to account for your tax burden, the same way individuals sometimes don’t pay enough attention to their capital expenditures or employment costs, you could easily lose a huge share of your income. You should look into taxable investments and organize your year-end tax filings to ensure there are no mistakes, no delays, and no missed opportunities for deductions and savings. Be sure to evaluate all your tax implications and possibilities. This will allow you to maximize your take-home amount personally and in the professional sphere, put your company’s revenue to work more effectively. 

7. Plan for the Unexpected

Nobody knows what the future holds. Still, you can’t just wait around for an unforeseen emergency to pop up and hope to deal with it when it arises. What you need to do is save enough money to ensure you have cash ready when something goes wrong. You might have to weather natural disasters, house repairs, car problems, catastrophic medical care, accidents, or extended unemployment. Therefore, you must prepare for uncertainty. Make sure to increase your savings during the good times to avoid a difficult situation later on.

When you have sufficient savings, the bumps ahead, while difficult personally, will not have such a dramatic effect on you financially. You have to be ready for unexpected financial exposure. Otherwise, your long-term goals are in danger of going unrealized. Besides, you have to look after the financial security of your family. Lastly, don’t neglect all necessary forms of insurance, such as short-term and long-term disability, medical coverage, home and auto, business, and umbrella insurances. Having a financial plan and a high standard for your financial health can help you escape hardship or even ruin.

Conclusion

Understanding the basic principles of financial management is key to a healthy, fulfilling life and to the success of any company. From organizing your finances to planning for the unexpected, each tip mentioned above will help you prepare for uncertainty and make more strategic decisions. Never neglect sound financial planning and advice. It is one area that all successful individuals and organizations have in common. 

Sound Accounts helps individuals and business owners make the most of their finances with individually tailored bookkeeping service plans. Contact us today to get started and see the difference an experienced bookkeeper can make for you and your business.

To learn more about financial management, check out our frequently asked questions and answers below.

FAQ

What is the most important principle of financial management?

There are several key principles to good financial management. One that should always remain a priority is to organize your finances. Good organization helps you stay in command of your money and future. Additionally, creating and following a budget will help you meet your financial goals. 

What are financial principles?

Financial principles are guidelines that people and businesses can follow to avoid financial hardship and continually build and expand. 

Why Are Financial Principles Important?

A few primary reasons financial principles are crucial are that they provide you with a framework you can follow to maximize your earnings and minimize expenses. Sound financial principles enable us to move ahead with a plan instead of making uninformed and reactionary decisions that don’t get us ahead.