Financial Foundations All Businesses Must Adhere To

Financial Foundations All Businesses Must Adhere To

Without a doubt the most important element in a successful business is proper financial policies and procedures. Many a company has been caught with insufficient cash flow, insufficient equity or some combination of factors that resulted in an otherwise successful enterprise careening into bankruptcy. It is this principle that is behind the almost universal agreement among executives that an accountant is the most important professional relationship, equal in every way to legal counsel.

Accounting Basics

The modern world is the result, some successfully argue, of the invention of orderly business practices, starting with double-entry accounting in the Italian markets of the 1300s. Generally accepted accounting principles are the bedrock upon which nearly all of the Western world’s capital markets are based.

Any company wishing to advance its own interests, grow and prosper must take advantage of the tried and true methods that enabled mankind to escape the dark ages and build the renaissance, the enlightenment and the modern age.

Cash Flow

Marvel Studios is one of the most successful entertainment companies in the world. But as their management discovered in the late 1990s, you can have an entire catalog of billion-dollar characters and still wind up in bankruptcy court. What happened to Marvel? Among other things, they simply ran out of cash.

The value in a business does not rely solely on cash, neither can it rely solely on any other store of value. Equity, capital, property, accounts, customers and talented employees are all extraordinarily valuable and indispensable to a growing enterprise but they can’t be used to pay the phone bill. A company that runs out of cash is as bankrupt as a company that runs out of customers.

Pricing

As strange as it may seem, pricing can also be a potential pitfall for a fast-moving company. It is always tempting for management to offer incentives to potential customers in order to obtain more business, but companies have to be careful they aren’t engineering a “starvation by discount” situation. A product or service is worth exactly what a customer is willing to pay for it and should only be offered for less if there is an equal or greater value obtainable as part of the deal.

Underpricing a product or service is the slow lane on bankruptcy road, just like a lack of cash is the fast lane.

No matter how small they might start out, companies that are built on a solid financial foundation have the best chance of becoming successful, long-lasting and valuable.

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