The Most Important Elements of Short-Term Financial Management
In any corporate structure, there are two types of financial management: short-term and long-term. These two crucial elements of corporate financial management are important to understand and require planning. Short-term and long-term goals can either stand alone or work together, and it’s vital to properly oversee these two aspects as you build on your business.
Short-term and long-term financial management both work to meet your budgeting and investing goals as a business. The short-term, especially, focuses on these components. However, with the proper planning and handling, financial management can help to combat potential issues and deficits, setting your business up for success even in times of struggle and over the long term.
So what are the differences between these two types of financial planning, and how can you better work on your short-term management of finances? First, look at how you can manage your business with its short-term and long-term goals and the crucial elements of short-term financial management.
What is Short-Term Financial Management?
Short-term financial management, simply put, is anything less than a year out. Though some long-term finances may be part of the short-term equation (such as office mortgage loan payments and long-term business costs), this type of financial management usually stays under the year mark. Where these factors into your business are the more immediate future or outcomes with sooner deadlines.
Short-term financial planning deals primarily with balancing short-term income and expenses, including cash, accounts payable and receivable, and inventory. With businesses, short-term financial management may require making budgets per department to better detail transitory costs, like marketing, over-time fees, and one-off expenses.
Loans are another potential short-term finance consideration since promotional interest rates can end after a certain period and cause increased payments. Daily costs and revolving debts can be in a business owner’s short-term financial management, since these things can change weekly or monthly.
Anything that requires immediate attention, whether due to certain deadlines or rates, can be added to short-term financial management. If the consideration goes beyond a year or has more wiggle room, it may serve better under the long-term umbrella.
Long-Term Financial Management Explained
Though short-term financial management is less than a year, long-term finances focus on anything more than a year away. Long-term finance includes investments like stocks, bonds, and other financial instruments. While short-term planning relies on solving immediate problems and strategizing for solutions, long-term finance focuses on building your strategy over time. It’s more of a “where you see yourself in 5 or 10 years” type of planning rather than the more definitive and clear goals of short-term finances.
Long-term financial management includes paying off your business’s mortgage, planning employee benefits and savings accounts, and paying off debt. Here, you project your future revenues and expenditures and plan accordingly, keeping in mind certain economic conditions, such as a recession. Though long-term goals are sometimes fluid, they should be well-defined like your short-term goals are.
Having the right balance of income statements, cash flow projections, and balance sheets will better prepare you for your long-term financial management and how to achieve these expectations. Since planning for the future can be uncertain, it’s important to hone in on your short-term goals and determine how they will factor into your long-term objectives.
Important Elements of Short-Term Financial Management Plans
To better set yourself and your business up for success, you should consider some crucial elements of short-term financial management. While not every process is necessary, these are helpful to keep in mind when configuring your finances.
Build a Tool Stack That Matches Your Short-Term Plan
This may sound like a given, but structuring your business with a budget is key. When you use software for this purpose, you’re giving yourself more time and energy to focus on other aspects of your business and streamline it more effectively and economically. Plus, when you budget your technology needs for your business, you can get an overview of which technology best serves your company while planning for your short-term expenses and revenue in a consolidated way.
Automate Some of Your Systems to Keep Things Flowing Smoothly
Using accounts payable technology helps to automate time-consuming practices, like invoices, expenses, and cash flow. Short-term finances rely on accurate data, and by streamlining these processes, you’re reducing potential problems while making your process flow more smoothly. Another great thing about automating your accounts payable is it keeps track of past numbers and data for easy searching and obtaining. This information will be crucial in determining your needs and potential future when planning and working toward your long-term goals.
Create Cash Reserves
Building a business savings account is always recommended. Owning your own business means there are often unexpected expenses and situations for which you want to be prepared. For short-term financial planning, you’ll want liquid cash flow that is easily accessed without penalty for withdrawal.
A simple savings account may work for this purpose. However, when building up your business savings, you should also draw out an estimated budget for how much to set aside. A good rule of thumb is to set aside at least 10% of your monthly profits, with up to 6 months’ worth of your operating expenses total in this account, before you start to invest in other instruments that can help increase your cash flow.
Organize Your Workflow
Having an organized system can be as simple as using the right tool to better manage and reach your short-term financial objectives. With many automation software packages and technologies, you can improve workflow while expending little effort on your end.
These tools help manage projects, handle invoicing, increase team collaboration, and much more while elevating your business and its short-term financial plans. When running your own business, it’s important to consolidate when and where you can to better focus on your bottom line outcomes and work within a robust financial management plan.
In Conclusion
When it comes to financial management, looking at the short-term and long-term will give you a comprehensive overview of what to expect.
Short-term thinking and planning will allow you to problem solve and strategize for the future, while long-term management allows you to decipher where you hope to be and how you can best get there.
Using these essential elements to better plan for your short-term goals, your business can thrive in the coming months and be set up for the long-term.
Short-term financial management is the process of planning and controlling a company's financial resources over a short period of time, typically one year or less. Short-term financial management involves managing a company's cash flow, accounts receivable, accounts payable, inventory, and other short-term assets and liabilities.
The most important elements of short-term financial management include:
- Cash flow.
- Accounts receivable.
- Accounts payable.
- Inventory.
- Other short-term assets and liabilities.
There are a number of things that you can do to improve your short-term financial management, including:
- Create a cash flow forecast.
- Set up a system for collecting accounts receivable.
- Pay your accounts payable on time.
- Manage your inventory levels effectively.
- Understand your other short-term assets and liabilities.
There are a number of risks associated with poor short-term financial management, including:
- Cash flow problems: Cash flow problems can lead to a number of problems, such as the inability to pay employees, suppliers, or creditors.
- Damaged credit rating: A damaged credit rating can make it difficult to borrow money in the future.
- Bankruptcy: In the most extreme cases, poor short-term financial management can lead to bankruptcy.
