Financial management techniques can be translated across multiple disciplines and applied to large organizations and individuals. But what is financial management, and how can you use it effectively? Strategic financial management is operating your finances effectively to succeed in your goals. The tools and techniques you use to balance your bank statements, choose investments and create budgets are financial management, and strategic management is using those tools to achieve goals such as getting out of debt.
Organize Your Finances First
One of the first things that experts, such as Kirk Chewning Cane Bay Partners located in St. Croix, will tell you about financial management is that you need to be organized before trying any solutions. Organization of your finances means first knowing where to find the information for your checking, savings or investment accounts, retirement funds, and debt. Then, compile that information in an easy-to-read format such as a spreadsheet to quickly determine your debt, income, and liquidity as needed.
Determine Your Debt To Income Ratios
One of the main things that lenders, or investors, will look at is your debt-to-income ratio. Sometimes this ratio is weighted more heavily than your credit scores because it can determine how much income is left to pay other bills such as rent, utilities or additional loans. While debt-to-income calculators offered by banking institutions and credit tracking companies can be helpful, it is vital to ensure those calculators include all your sources of income and debt. For instance, if you take cash commissions for clothing alterations below the tax reporting threshold and never deposit that money, your bank’s calculator will not have a real income.
Understand Risks and Diversification
Risks and diversification are not just terms for insurance and investment purposes; they are essential financial management concepts that will impact your company’s working capital and personal budget each month. To continue the above example, if you decide to turn your clothing alterations hobby into a full-time job, you risk professional liability. Altering a dress without considering the need to take long strides can result in injuries to your customers and a lawsuit. It would be best to cover this increased risk under business insurance to help cover any damages.
If you quit a full-time career to start your tailoring business, you are reducing the diversification of your income and increasing the risk of defaulting on debts if the company is slow. Diversification of income is just as crucial as the diversification of your investments. Putting all of your eggs in one basket increases the chances of losing them. You can diversify income streams by adding products and services to your company, renting out space you own or even selling ad space on your website. You can also diversify your retirement funding by starting traditional retirement savings plans, investing in the stock market, and investing in real estate.
You can apply business professionals’ basic financial management tips to personal finances to help you meet goals. These tips include organizing your finances in an easy-to-read format, understanding the financial risks you take and your debt-to-income ratio, and diversifying your income streams and retirement savings.