What Are Effective Financial Practices?
Most successful small businesses result from a good idea, creative marketing plans and — above all — sound financial management. While adequate startup funding and an accounting system that works for your business are vital to a sound financial management system, both are only starting points in the development of a sound financial plan. Moving forward by implementing a system of effective financial practices is how you’ll ultimately gain and maintain control of both your budget and future financial success.
Financial Practices Definition
The term “financial practices” refers to the set of common methods or standard operating procedures you develop for carrying out accounting, financial reporting, budgeting and other activities related to business finances. Each one serves to support business policies, establish accountability and provide step-by-step instructions for completing a task or activity. It’s important to understand that while SOPs are a component in a sound financial management program, it’s the information an SOP contains rather than the SOP itself that determines whether the financial practices outlined are successful in producing a desired result.
Components of Effectiveness
Effective financial practices outlined in SOPs adhere to accounting best practices and federal and state compliance regulations, while remaining in line with your long-term goals and future growth plans. Although privately held businesses aren’t held to the same accounting standards as public companies, generally accepted accounting principles outline accounting standards that many small businesses comply with voluntarily. The objective is to establish consistency and transparency in financial reporting. Reviewing federal and state regulations that specifically apply to your business is essential for creating effective compliance SOPs. Incorporating your vision for the future and long-term business goals into SOPs increases the effectiveness of financial practices relating to such things as capital asset purchases and short- or long-term investments that assist in achieving long-term goals.
About Internal Controls
Incorporating strong internal controls into financial practice SOPs is one of the best ways you have to increase effectiveness and protect the best interests of your business. Internal controls such as separation of duties, transaction authorization standards and documentation requirements increase accountability and decrease risks associated with financial practices. For example, cash receipt practices combat risks such as incorrect data entry and lost or stolen cash. SOPs for cash management in a retail business can be significantly more effective when cash receipt and cash reconciliation tasks are completed by different employees, when returns or refunds require authorization from a shift supervisor, and when registers are counted down at least once during a shift.
Knowledge Is Key
Achieving effectiveness objectives requires a basic understanding of small-business finance. The National Federation of Independent Business recommends that in addition to consulting with a business adviser or accountant, you conduct research on your own to expand your knowledge base. The more you know about practices relating to cash management, budgeting and forecasting, costing, income and employer tax requirements, and financial reporting, the better position you’ll be in to ensure financial practices are effective and your business is protected from fraud, employee theft or abuse of business resources.