The words “financial management” may crop up frequently in business conversations, but how often do we stop to think about what they mean and whether we have sound processes in place for the financial health of our company?
In this guide, we’ll cover what financial management involves and some of the tools available to help your business.
The Importance of Financial Management in Business
What exactly is financial management? It involves organising, controlling and directing a company’s financial resources to achieve its business objectives. On one level, financial management is about detail (having the right processes and reporting lines in place, for example). On another level, it is very much a strategic operation due to its essential role in understanding the current state of the business and creating plans for the future.
Financial management can also be thought of in terms of budgeting (the state of the present) and forecasting (the state of the future), both done through bookkeeping and accounting. Bookkeeping is the recording of financial transactions, while accounting involves using the information from bookkeeping to understand a company’s financial position and make strategic decisions with that information.
Let’s take a closer look at why financial management is essential for business:
- Ensures that the business has the funds to keep functioning.
- Provides visibility over the whole business, which aids decision-making to minimise risks and control costs.
- Supports accurate forecasting, which ensures a business has enough money to cover expenses, make investments and give shareholders a good return.
- Creates financial independence: a detailed knowledge and understanding of a company’s finances help leaders have more control over business decisions.
- Allows for emergencies because sound financial management can ensure assets are available when required unexpectedly.
Payroll and Expenses Management
Within the broader concept of financial management, two areas are essential for understanding the current state of a company’s finances:
What is Payroll?
Payroll refers to the list of employees who need to be paid, how much money they should be given, and when. Understanding exactly how much money needs to be paid out to the workforce and when this needs to happen is critical to managing cash flow, and payroll preparation is an important job to get right. For many companies, the wage bill is one of the most significant outgoings of cash, so ensuring their payroll is accurate and planned is essential for the ongoing financial health of a company.
What are Expenses?
Understanding what expenses will be incurred as part of a business’ usual practice is also essential for budgeting and forecasting. The term ‘expenses’ covers everything from business expenses incurred by employees as they do their jobs to every single cost a company has to account for in running the businesses. Like payroll, managing expenses is key to ensuring a company has enough money to function and plan for the future.
Let’s take a closer look at these two key pillars of financial management.
Understanding Payroll Processes
We’ve looked at how paying employees accurately and on time is key to sound financial management. Now, let’s focus on the different processes involved in payroll. The following aspects need to be covered to get payroll accurate:
1.Employee Classification and Compensation
The foundation of payroll is knowing which roles employees perform and the appropriate compensation package. Having secure systems where contracts are stored, personal details can be updated as required, and the specific compensation arrangements noted in detail ensures that companies have the correct basic information to start creating their payroll report.
2. Legal Compliance and Tax Obligations
The basic information of who is due to be paid and how much then allows companies to move to the next stage, which involves calculating tax payments and ensuring legal obligations such as statutory pay and minimum wage are met. In the UK, most employees pay tax through PAYE, where the employer calculates the amount of tax owed and makes the contribution to HMRC before paying the employee. As a result, employers must understand the tax implications and legal compliance required for each employee. Having processes to ensure these implications are understood and the appropriate financial actions taken is critical to producing accurate payroll reports.
3.Payroll Schedule and Timing
In the UK, payroll usually runs weekly or monthly. For employees, knowing their pay amount and when it will appear in their bank account is essential for job satisfaction and engagement. Most people rely on their salary to meet their living costs, and receiving their pay on time allows them to make financial plans and meet their commitments. In many ways, getting payroll right is the bedrock for company success. Paying employees on time and the right amount shows they are valued and supported, leading to increased productivity.
Technology Solutions for Payroll
Once we understand how much information needs to go into creating and managing a payroll report, it’s easy to see the benefits of payroll manager software that stores the necessary details, automatically calculates the payments required and can run on an agreed schedule. Let’s have a closer look at how digital solutions for payroll work.
1. Payroll Software and Automation
Payroll management software is a digital system that automatically creates, manages and sends a payroll report to accounts at an agreed point (weekly or monthly). Payslip software also automatically generates payslips. The system takes previously inputted information on contracts, compensation agreements and compliance obligations and uses this information to generate an accurate payroll report. By automatically calculating how much to pay each employee, payroll software reduces manual work, which saves time and minimises the chance of mistakes through human error.
2. Benefits of Cloud-Based Payroll Systems
Many companies now prefer cloud-based payroll systems, although some still use site-based systems with all the company’s information stored in a server based on an office site. Cloud-based systems are accessed via the internet and use software hosted on remote servers. There are several benefits to these systems:
- Easy to access wherever you are: you can ensure that your staff are paid accurately and on time regardless of whether staff involved in payroll work remotely.
- Cost-effective: cloud-based systems usually require a smaller monthly fee rather than a significant upfront investment.
- Automatic updates: if tax structures or legislation changes, cloud-based systems will update with the relevant information.
- Room for growth: cloud-based systems are usually designed to be used by businesses of all sizes.
- Security: cloud-based services need to have the highest level of security features to protect all their client’s data, so a reputable cloud-based provider will ensure your data is well-protected
3. Integrating Payroll with Accounting and HR Systems
Managing payroll through a cloud-based digital system is one of the first steps to sound financial management. For some companies, the payroll report generated by the system is then sent to their accounts department or external bookkeepers. However, one of the strengths of cloud-based systems is that it is possible to integrate payroll reports with accounting systems, removing the need for extra stages.
Likewise, integration between HR and payroll software means that there is one source of truth for details on contracts, personal information and specifics that feed into payroll reports, such as leave and tax requirements.
Ensuring Accuracy and Compliance
Financial management involves knowing what you are spending and receiving (accuracy), as well as understanding your tax and legal requirements obligations (compliance). Here are three ways your business can be sure it is compliant and has accurate financial information:
1. Regular Audits and Reviews
Regular audits and financial reviews allow you to be confident that you understand your company’s financial health accurately and can help spot issues as they arise. Audits can be both internal and external, and can be a mandatory requirement. Regular audits ensure that the reporting of the company’s financial position is accurate and honest. A financial review differs from an audit as it is usually less detailed and comprehensive but instead provides an overview of the financial state of affairs. Once senior leaders have this overview, they may look more closely at certain business areas.
2. Staying Informed about Tax Code Changes
On a personal level, tax code changes can significantly impact an individual employee’s take-home pay. Likewise, on a company level, if there are significant changes in the amount of tax you will pay, knowing about this means you can include it in your plans. Sound financial management includes having systems to inform you about tax code changes. These ensure that you remain compliant and have an accurate picture of your cash flow.
3. Employee Training on Payroll Procedures
While a digital system can take much of the pain out of calculating payments and providing the correct information for a payroll report, it is still essential to have someone with an overview of the report who can spot any problems and resolve issues. The best way to get an accurate and compliant payroll report is to have skilled employees working with high-quality digital software. Training for employees who use the system is essential: it not only helps employees feel more confident about what they are delivering but also helps them feel supported and valued, encouraging them to do their best job.
We’ve looked in detail at how important it is to get payroll right for sound financial management, so let’s turn our attention to expense management. An expense management system provides information, allowing you to plan and accommodate expenses, an essential part of sound financial management.
Categorising and Tracking Expenses
On a broad level, business expenses are anything the business incurs as part of its operating costs. Keeping a close eye on what these costs might be is essential to avoid hefty, unexpected bills that impact the bottom line. Categorising expenses is the first stage to allow accurate tracking of all costs. The following three steps form the basis of an expense system that can categorise and track your expenses.
1. Identifying Essential vs Non-Essential Expenses
Make two lists to differentiate between essential and non-essential costs. Both types of expenses are usually necessary to the functioning of the business, but understanding the difference between the two ensures that leaders have a detailed and solid knowledge of what is essential for business success and what is flexible.
Essential expenses are those without which your business cannot operate. For example, staff, utilities, rent and whatever the business is selling (whether this is inventory or a service). Non-essential costs are discretionary and can be reduced or removed without affecting the business’s operations. Examples include travel and entertainment, subscriptions and advertising spending that is not essential. Remember that a non-essential cost may still be significant to running the business but just not absolutely essential.
2. Creating Expense Categories for Better Tracking
Good financial management involves ensuring you have a detailed understanding of where you are incurring costs. When this approach is applied to expenses, using categories for different expenses means you can immediately see which business areas have the more significant costs. This information provides you with a company expense tracker and allows you to make better-informed business decisions.
3. Implementing a Comprehensive Expense Policy
As well as understanding and categorising your expenses, another way to control your business expenses is to create a comprehensive expense policy. It provides a reference for everyone in the business and provides a framework for a consistent approach. A comprehensive expense policy should be fair, clear and easy to use. Someone in the business should be responsible for the business expenses policy and ensure that it is regularly updated and updated with any changes from either the business’s perspective or legislation.
Expense Reporting and Approval Processes
As well as ensuring that everyone in the business is aware of and uses the expenses policy and that expenses are appropriately categorised, another aspect of business spend management is to ensure that expenses are approved promptly and that leaders receive relevant reports. Expenses software can help with this, as can expense management companies.
1. Streamlining Expense Report Submission & Workflows
A system for recording, submitting and approving expenses that is easy to use and streamlined is vital to ensuring that expenses are recorded accurately and paid on time. You need to know what your outgoings are and why you have incurred them, and this means that all staff need to understand requirements in this area. Keeping the workflow involved in expenses simple and easy to follow will maximise the chance of expenses being submitted accurately and on time.
2. Leveraging Technology for Expense Management
Expense management software can help manage the workflows and reports involved in expenses. Tracking expenses in a digital system makes it easy for managers to approve them. Having one place where receipts or invoices are uploaded and stored means that information on costs is in one central place. Centralising data in this way makes running reports and keeping a close eye on expenses quicker and easier. These reports allow managers to get valuable insights into spending patterns and spot potential issues or concerns.
Technology can also help with expense management as it is much easier to introduce and approve business expense cards for employees. Companies can use traditional business credit cards or virtual corporate cards, which provide a digital payment system where the company pays directly for the expense via software.
Integrating Payroll and Expense Management
We’ve looked at the positive impact of managing payroll and expenses properly, so now it’s time to consider how integrating the two functions can further support good financial management.
With little or no cross-functional collaboration, departments may focus on their own objectives without considering the bigger picture. In some cases, this can lead to inefficiencies, a lack of transparency, or even mistakes or issues that can damage the company’s financial health. So, how can you promote cross-functional collaboration?
1. Coordination between HR, Finance and Operations
The first step in cross-functional collaboration is to integrate processes and workflows so that there is coordination between HR, Finance and Operations teams. These departments can work on different cycles (for example, monthly reporting on the financial position versus recruitment or offboarding, which depend on business needs) and see the business through different lenses (people, money or activity). While these differences are essential for the successful running of a company, internal systems that encourage data sharing between teams benefit the company’s financial health.
HR teams can use digital systems to centralise their data and streamline workforce planning; finance teams can work with the centralised data for payments such as payroll and forecasting; operations teams can easily see where they need to control costs and change decision-making processes or workflows.
2. Communication Strategies for Seamless Integration
Cross-functional collaboration means integrating the work done by different departments, often through introducing a software system. Ensuring that the process of integration is as seamless as possible is mainly dependent on communication:
- Involve the workforce in planning for the new system to ensure you fully understand the needs and help employees feel part of the change process.
- Communicate clearly and widely the benefits of the new system.
- Organise dedicated training sessions on the new software and an ongoing help desk to answer queries as people use it.
- Nominate software champions, people given time to get to know and love the new system so they can share their knowledge and promote it.
- Actively ask for and listen to feedback on the new system so you can make changes that will help the teams using it.
Risk Management and Compliance
Focussing on sound financial management is not purely about understanding your cash flow, safeguarding your assets and being able to produce forecasts; it is also about managing your risks, which involves being legally compliant.
Legal and Regulatory Compliance
Complying with both legislation and industry-specific regulations is essential for sound financial management. Companies should have a process for keeping up with any legal and regulatory compliance changes, whether an individual employee with specific responsibility or an outside agency retained to provide this support. Every company has employees, so it’s worth considering a couple of particular aspects of compliance when it comes to your people:
1. Staying Current with Employment Laws
Employment law can change frequently, and keeping up to date with what your business requires to stay compliant is essential to treat your employees fairly and avoid any legal action, fines, reputational damage or even imprisonment. Changes may feel small and less relevant to your business but they can significantly impact individual employees.
There are different ways to stay current with employment law:
- Become a professional association member for your industry or industry working groups.
- Subscribe to online and print publications, and ensure you read their newsletters.
- Use an HRIS (human resources information system) that automatically updates you when a new law comes in.
It’s also a good idea to regularly review and audit your contracts and other documents linked to working regulations to ensure they are still valid and in line with updated laws.
2. Ensuring Data Security and Privacy
When it comes to compliance with individual employees’ rights, being on top of how you keep their personal data secure and private is critical. In the UK, this is known as GDPR and it is a legal requirement for businesses to meet specific GDPR requirements. The Information Commissioner’s Office has a guide to data security, which is an excellent place to get more detail. Here are five quick tips to get you started:
- Share information on a need-to-know basis only.
- Ensure all employees understand and can execute their responsibilities when it comes to data.
- Check password and two-factor authentication rules are being followed correctly.
- Use secure networks to access or transfer data.
- Exercise caution when taking data offsite or out of the secure cloud.
Continuous Improvement and Evaluation
We’ve seen how having the right tools, processes and people in place is essential to having good financial management. However, it’s not simply enough to put a system in place; it’s also crucial to keep evaluating your position and making changes as necessary. One of the ways to review how well your strategies are working to ensure quality financial management is to introduce regular financial health checks.
Regular Financial Health Checks
Financial health checks can include regular audits or financial reviews, as well as reviewing key performance indicators for departments involved in managing the financial health of a business.
1. Conducting Financial Audits & Financial Health Checks
Regular audits, financial health checks or financial reviews are crucial to keeping on top of how well your company is performing. These are all ways to ensure that the information finance teams provide represents an accurate picture of the company’s financial health.
In some cases, audits will be a legal requirement, but either way it is good business practice to take a step back and look at the company’s position from a different perspective. An external audit checks the truth and accuracy of a company’s financial statements and uses people outside the company to do this work, which helps to ensure unbiased evaluation.
There is also value in an internal audit, which is done by people working on the company’s behalf, evaluating current performance and identifying areas for improvement.
2. Key Performance Indicators for Financial Management & HR Reports for Finance
Key performance indicators (KPIs) are measurable benchmarks that allow leaders to track and evaluate their department’s performance. Sound financial management involves departments having clear objectives of what they are expected to deliver and being able to track how they are performing against those objectives.
KPIs for financial management focus on areas that can grow the business, such as revenue concentration, net margin, debt vs. equity and stock turnover. They can also include tracking the reliability and timeliness of financial reports, the regularity of audits and financial reviews, and how accurate planning is.
As you would expect, KPIs for HR will be focussed on the people side of the business, for example, tracking how long recruitment takes, staff turnover and length of time in position. HR teams may also produce analytical reports assessing the teams’ overall position within the business. As well as the metrics mentioned above, these can include employee demographics, diversity and inclusion, training and development, and employee engagement.
On this page, we’ve considered how essential good financial management is for business growth. Financial management involves having the right processes and tools to fully understand the company’s current position, which helps with strategic decision-making, forecasting and planning.
We looked at some key ways companies can closely monitor their financial commitments, specifically the management of payroll and expenses, using technological solutions. Software can help integrate the work of different departments, reduce mistakes and save time by automating some of the processes, and ensure that changes to legal and tax regulations are taken into consideration immediately.
Above all, sound financial management involves both processes and people. Having systems in place to save time when it comes to the processes involved in financial management is key because they free up time for the people involved. With more time and a growth mindset (the approach of always learning and striving to improve), your people can focus on the strategic running of the business rather than the operational side.