Why Is Proactive Financial Management So Important for Businesses?

Nida Bohunr | May 16 2021

No business owner starts their company without having a thorough plan for its execution and management. Understandably so, a business can never achieve its purpose if there isn’t a robust strategy backing it up that dictates every move and financial transaction. Financial planning is inherently related to the core processes of any business. It is a necessary practice that allows business owners to create a revenue model, set realistic goals, and track liabilities. As we find ourselves working in more flexible ways to manage our business operations, it’s also equally important to re-evaluate how our company’s finances operate to improve the way we work and ensure consistent profitability.

Whereas conventional management methods such as reactive management are usually preferred by financial managers to dictate the growth of their company, its effectiveness in the long-term falters steadily due to its failure to keep up with the increasing requirements of a growing business. That’s why financial managers need to adopt a proactive approach to accounting to allow themselves to be prepared for any unforeseen disruptions in the cash flow and highlight financial risks before they become detrimental reality impacting the financial viability of your business.

To understand the importance of proactive business financial management, we first have to analyze it deeply to see how effective it is in its true nature.

What is Proactive Business Financial Management?

At its core, proactive business financial management is financial management, but with an extra pinch of preparedness and provision. Whereas some people rely upon the phrase ‘’Desperate times call for desperate measures,’’ Proactive management dictates taking all the necessary precautions and being prepared beforehand before the situation turns into a crisis. Let’s try to understand this phenomenon with an example.

Understanding Proactive Management Through A Visual Aid

Imagine you’ve just started a small business, and you’re continually investing more and more money into it without accounting for adequate ROI or taking measure of the various KPIs. You may think you have a ballpark estimate of say investing roughly $20,000 in your business, but after calculating, you come to realize you’ve spent nearly three times as much. If you take account for any borrowing costs, the hole in your pocket may be much bigger.

To prevent something like this from happening, proactive management indoctrinates a strategic approach to financial management that allows you to make better & informed financial decisions. This approach enables you formalize your business plan in terms of short term and long-term financial metrics and raises reg flags in case things go off track.

So, What Does a Proactive Financial Manager Do?

A proactive financial manager provides a business owner data that includes:

  • A complete framework of a long-term financial plan.
  • Executional Step on bringing such a plan to life.
  • Offering beneficial investing decisions.
  • Offering solutions on the process of funding such decisions.
  • Advising about strategies to maximize profits.
  • Tackle cash runaways.
  • Ensure steady cash flow.

Now that we’ve examined proactive strategy and its benefits for your business, let’s dive deeper and see how it stands against a reactive strategy.

Proactive Vs. Reactive Business Financial Management

A reactive approach to business financial management is one where your money necessities drive you. As the name dictates, a reactive strategy is the one where you respond to a situation after it has gone south, rather than preparing for it beforehand or setting up countermeasures to prevent a crisis from happening in the first place. It usually does more harm than good, you know as they say: ‘A stitch in time saves nine’. The reactionary approach wastes a ton of time and jeopardizes both the financial opportunities for a business as well as the financial integrity of the business. Instead of having a thorough plan, you’re only left firefighting crises. You find yourself making impulse investment or borrowing decisions and then rush in trying to make ends meet when a financial crisis comes to the surface. In simpler terms, it translates to waiting for a pot of milk to boil until spills everywhere, then trying to clean up the mess.

Shockingly this is the way most businesses operate without realizing there already exists a much more efficient method to handle finances. Transitioning into a proactive financial mindset allows managers and business owners to discover new business opportunities, drastically reduce costs and double the revenue, maximize financial security and minimize the risks.  A Win-Win Approach!!

What Does It Mean Having a Proactive Financial Manager for Your Business?

Proper cash flow management is essential in any business and implementing a smooth and streamlined process for managing accounts receivable is one of the best ways to ensure good and healthy cash flow. Proactive business financial managers utilize concepts such as zero-based budgeting in their planning.  Zero based budgeting is the practice of identifying all expenses that need to be made at the beginning of every new period. Then analyzing these expenses to make  robust cash-flow predictions that are backed up by real data and thorough planning, rather than a shot in the dark estimation.

A proactive financial manager performs:

  • Routine financial analysis to understand the numbers as close to the heart as possible.
  • Upon stumbling onto any miscalculations or intuitions of soon-to-happen errors, reports to the CEO before taking preemptive measures against it.
  • Afterward, they will guide you in running your business by creating a well-defined strategy that only results in profitable growth and new opportunities to seize.

Whereas having a proactive financial management can substantially improve and simplify your finances for the long run, you can streamline your business finances by utilizing and hiring the best talent and expertise to do the job for you. Outsourcing business accounting to a virtual financial management specialist who handle all your financing, accounting, and bookkeeping needs on your behalf while allowing you completely focus on growing your business can be very rewarding.

See Also: Top 6 Small Business Bookkeeping Tips For Steady Financial Success

How to Find a Suitable Proactive Financial Management Service for Your Business?

Choosing the right financial partner to delivery proactive accounting for your business is essential. Online accounting services such as Monily conduct a comprehensive analysis of your company’s financial situation before offering proactive solutions. Our experienced Chief Financial Officers (CFOs), provide regular, detailed financial insights, helping you to maximize bottom-line for your business and much more. With Monily’s excellent track record of helping small businesses and startups, you’ll have complete freedom and independence to pursue new ventures while having up-to-date accounting, bookkeeping, and financial records.

Author Bio

A highly skilled accounting professional at Monily, having extensive and diverse experience of working in US healthcare and agriculture industry. Nida is a CA finalist with expertise in Bookkeeping, Auditing, Bank Liaison, Tax Preparation, Accounts Payable, Accounts Receivable.