Economic and financial management of a company

In these times, 21st century companies are looking to increase profitability through new products or services, in order to obtain a better return on investment (ROI) in the short term.

The economic and financial management of companies requires a great deal of analysis work, carried out by various areas of the company, for example: finance, auditing, purchasing, sales, human resources, compliance, i.e., it is an integral task. 

What is the economic and financial management of a company?

The economic and financial management of a company is an administrative accounting procedure that consists of planning the purchases, sales, expenses and other income of the company, with the purpose of being able to reasonably predict the continuity of the going concern and its sustained growth, through the obtaining of economic benefits and the support of losses, in an organized manner over time.

In short, it consists of determining the appropriate prices for goods and services, which allow to support the costs and expenses of the activity carried out, obtaining an adequate profitability, but at the same time coordinating in time the collections and payments, in order to avoid harmful time lags. 

What are the economic resources of companies?

The economic resources of a company consist of all those revenues that can be converted into assets for the organization, i.e., that will represent cash, cash equivalents, exchange goods, goods for use, investments and other assets, which allow the company to have adequate liquidity to meet short and medium-term payments, and solvency for future payments to be made in the long term.

These economic resources enable investments to be made to expand the company's activities, installed capacity, technology, human capital and other resources that will generate improvements in its operations and, therefore, in the return on investment.

Advice for optimal economic and financial management of companies

The economic and financial management of companies can be optimally achieved by following some key tips that will allow better results in less time. 

Set objective KPIs

The KPIs (Key Performance Indicators) are key indicators that serve to measure the performance of the company in its different areas and to determine the performance of the company's processes.

Depending on who the stakeholders are, the KPIs in which they will have an interest will vary:

• Suppliers: liquidity, operating cycle, indebtedness, solvency.
• Banks and bondholders: cash flow.
• Investors: profitability and liquidity.
• Management: profitability, efficiency in the use of resources, positive cash flow. 

In the economic and financial management of a company, the most relevant KPIs are:

- Profitability KPIs: these measure the company's capacity to obtain an adequate return on sales, assets and invested capital. This set of indexes make up the ROI (return on investment).

• Profitability margin
• Return on assets
• Return on equity

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- Asset and liability turnover KPIs: measure the turnover rate of a company's accounts receivable, inventories and accounts payable.

• Portfolio turnover
• Average collection period
• Inventory turnover
• Fixed asset turnover
• Total asset turnover
• Turnover of liabilities
• Financial gap

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- Liquidity KPIs: measure the company's ability to pay short-term obligations.

• Working capital
• Current liquidity
• Acid test

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- Debt KPIs: measure the company's overall debt position in relation to its assets and earnings capacity.

• Autonomy
• Dependency
• Indebtedness
• Leverage

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- Equity KPIs: measure the company's backing in high value assets, but also the impossibility of transforming assets into cash in the short and medium term.

• Solvency
• Immobilization

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Manages collections and payments with diligence

The financial activity par excellence consists of cash flow, a tool by means of which the collections and payments of the companies are managed, to achieve a rotation of cash and bank accounts, which allows balancing the collections and payments to be made.

The best way to plan the collection of revenues from sales or other sources is to forecast based on past accounting periods and, in the case of new companies, on the periodicity of collections from companies engaged in similar activities. 

In this sense, the means of collection used by the company will be the main variable to be taken into account to predict collections. For example:

- Income from cash or bank transfers is different from income from current account or credit card payments, which require a longer wait to obtain.

- Short or long term investments: it is necessary to invest the money received in cash or by bank transfers, but always taking into consideration the percentage of the investment that must be released at a certain moment to pay payments.

The organization of payments depends on the source of financing chosen and the type of payments to be made, for example:

- Tax and social security debts may be financed within a certain time limit and at certain financing rates established by the tax authorities. 

- Bank debts can be refinanced if necessary, but at interest rates that can be high. 

- Direct debts with suppliers are often a quick source of financing, but they generate high costs.

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Periodically studies how to reduce costs

Cost analysis involves the conscious analysis of each of the needs of the areas involved in the production process of manufacturing, sales and after-sales of goods and services.

A cost reduction that does not take into account the quality of the inputs to be used, the market in which the company operates, customer needs, effective points of sale, after-sales actions, among other factors, will be effective in the short term, but will have undesirable consequences in the long term.

Companies that cut costs without measuring limits, and whose sole objective is to obtain a better ROI (return on investment), end up jeopardizing the going concern.

The periodic cost study, carried out through a conscious analysis of suppliers, markets and financing sources, results in short and long term benefits for the company.  

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Analyzes the profitability of each product or service

Companies can have a variety of core and non-core businesses. In today's world, it is essential to diversify activities to avoid massive losses in case of market problems.

It is essential to have tools for continuous monitoring of the profitability and cash flows generated by the different activities carried out by the company.

One product may be cost-effective, but not "sellable" in the market where the company operates. Another product may be less profitable in terms of costs, but generate continuous sales in the short and long term.

To measure the profitability of a product or service over time, the following scheme should be considered for each product or service:

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Analyzes the benefits

In the world of profit, much depends on the spirit of the investors, as there are investors who aim to make a profit at any cost, regardless of ethical and legal issues.

Other investors, on the other hand, take into account not only the legality and integrity of operations when it comes to obtaining profits, but also reputational issues, such as belonging to companies that reduce their carbon footprint, that hire personnel with different abilities, that carry out gender and diversity policies, among other positive social actions.

The benefits of a product or service can sometimes be measured directly, calculating results in concrete numbers, but other times, they can only be measured in reputational benefit or long-term risk prevention. 

For example: a company that sells its products in recyclable containers is likely to obtain a lower profitability of the product in question in the short term, but the generation of awareness in societies about recycling, i.e. its good corporate image, will result in a higher number of sales in the long term, and in obtaining valuable customers.

Healthy and competitive companies are those that generate value for third parties and society, above prices and hard profitability numbers. 

Incorporates risk management software

The third parties with which the company relates are fundamental to sustaining and improving corporate reputation, and with it business profitability and ROI (return on investment).

Third-party risk management is an activity that must be carried out 24/7 to avoid legal, economic and reputational damage that the company may suffer as a result of direct or indirect action by third parties.

A secure risk management software, compatible with the company's management systems, easy to use, providing complete and timely information regarding third parties, and displaying risk management indicators, will be essential to achieve successful results in third party risk management.

Compliance Training

The creation of a Compliance culture in companies, in line with the proposal of the COSO III report, includes comprehensive Compliance training, covering both communication and training, referring to the fulfillment of the following objectives:

- Management objectives: strategic, tactical and operational.

- Reporting objectives: internal and external, financial and non-financial.

- Regulatory compliance objectives: internal and external, laws and regulations.

The economic and financial management of a company requires Compliance in order to meet management, financial reporting and regulatory compliance objectives.

Importance of a company's financial management

The financial management of a company is relevant from its incorporation to its total or partial sale. A company can pass KYC and Due Diligence procedures practiced by third parties for various purposes, when it has as a pillar the compliance with legal regulations and voluntarily assumed standards.

Financial management based on compliance and transparency of operations, in accordance with the needs of the company, its partners and third parties, generates value in the company and trust towards stakeholders. This will lead to a sustained growth of the company, which will undoubtedly avoid future economic problems and will result in a better ROI (return on investment).

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