Personal Money Management

Why Personal Money Management Is Important

In order to understand why personal money management is so important consider the following questions.

  1. Do you ever worry about money?

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  2. Does it ever seem like your money just disappears and you have no idea where it all went?
  3. Are you now on your own (or soon will be) and you have no idea how money really works?
  4. If you’re married, do you and your spouse ever have tense conversations (or flat-out argue) about money?
  5. Would you like to know how much money you can safely spend before your next paycheck and still be okay financially?
  6. Do you have hopes and dreams that are bigger than your bank account and you wonder if you will ever be able to achieve them?
  7. Do you have a tendency to spend money on things that you can’t afford?
  8. Despite big plans, do you always have trouble coming up extra money to save or invest?  Would you like to know what it will take to make that happen?
  9. Does it seem like you never make any headway paying off your debts (or worse, they continue to grow)?
  10. Have you ever felt overwhelmed by the thought of what it would take to get your finances organized?
  11. Does it seem like you’re never getting ahead despite the passage of time and all of your hard work?
  12. Do you sometimes feel tossed about as external events crash upon you, feeling that they are in control of your financial destiny rather than you?

If the answer to any of these questions is “yes” then I would suggest that personal money management is very important to you.  Then you’ve come to the right website.  Keep reading!

Related Articles and Information on Personal Money Management

If you have not already done so, reading the following articles will enhance your understanding of the concepts presented in this one.

Using A Budget Planner Template

I recently received an email from John about using a budget planner template.  He wrote:

“Hello, I’m feeling a little lost and have some questions in regards to budgeting and saving.  1. Which budget planner template should I use?  2. From the total salary what percentage is ideal to spend for various needs, and how much to be saved for future?  Any insight would be greatly appreciated.”

It’s a question that we all must answer. Even if some of us would prefer to ignore it! Because, with rare exceptions, we all have to deal with having just so much money to cover all our expenses. And, if we spend more than we take in for very long we get into trouble.

Let’s look at a “typical” budget planner template. Then we’ll discuss it.

Category% of Income
Everything Else5%

Understanding The Budget Planner Template

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The first thing you’ll notice is that I didn’t include any taxes (either income or Social Security). You can choose to do that if you like (in fact, it’s a real eye opener). But for our purposes it’s easier just to deal with your ‘take home’ pay.  The second thing to notice is that this is a guideline, not a straight jacket. The truth is that very few of us will fit into this exact framework.  So if your spending doesn’t match, don’t despair! Analyze the situation before you panic!  Try our free excel budget template!

Customize the Budget Planner Template To Fit Your Wants & Needs

For instance maybe your entertainment spending is closer to 10%. Is that a problem? Maybe not, if you’re young, single and sharing an apartment with three friends. In that case what you save on housing is going for entertainment. So overall you’re not spending more than you’re making.  Or you may be a city-dweller where housing is very expensive (think NYC). But because of public transportation you don’t own a car. So the extra you spend on housing is offset by the reduced spending on transportation.  You get the idea. Tailor your spending plan to your needs. And, adjust it as you go through life and your needs change.  One other thing to notice is that housing, food and auto make up the lion’s share of the expenses. That’s true for almost everyone.  It’s in those three areas that most families get into trouble. Most often by buying a home or vehicle that they cannot afford. But once the commitment is made it’s very hard to undo.

Categorizing Your Expenses

You might wonder where a certain expense goes. For instance, household cleaning supplies. Many people buy them at the grocery store. So are they a housing or food expense? The answer is: it doesn’t much matter. Put them wherever it seems best to you. The key is always putting them in the same place, so you can compare results from month to month.

Another common question is what should I do with charitable contributions. You can either take it off the top (like taxes) or create a separate category for it. If you believe that contributions should come before your expenses you’ll want to take it off the top. If you think that it’s part of your regular spending then include it as another expense category.  For a budget planner template to be effective you must continuously follow your progress.

How Much Should You Save?

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Finally, let’s look at John’s question about saving. There probably isn’t any single right answer, because saving isn’t really an expense. It’s an investment for a better future.  So I prefer to think of savings in terms of priorities. Before I can put money aside for savings I need food and a reasonable shelter. Probably also need dependable transportation to get to my job.  But after those basic needs are met, it’s time to begin saving some money. Not necessarily the 10% in our guidelines, but 2, 3 or 4%. Enough so that there’s some money set aside for the so-called unexpected expenses that happen to us all (dead appliances, home and auto repairs, unexpected sickness, temporary lack of work).

One other comment about savings. Paying off debt (especially credit card debt) is a little like savings. Consider payments used to reduce the amount owed as if they were savings or a Bank CD.  Finally, for those of you who don’t want to bother with any of this. I know what you’re thinking: I’m fine and don’t need any help monitoring my money. Just remember that most people who are in trouble today said the same thing when everything looked good to them.


Stock Valuation – How To Value A Company

Stock Valuation – The Relationship Between A Company’s Stock Price and Cash

In another article titled Companies To Invest In, I made the point that, at its core, a well-run company is simply a money making machine.  That concept – that the value of a company is ultimately tied to cash – is one of the keys to understanding how to value a company and it’s relationship stock price.  Stock valuation are great to get quick snapshot of a company’s value.  I’ll illustrate this point with a simple example, and then build on it in ensuing articles.

How To Value A Company – Cash Per Share Example 1

If there were a company that had $1,000 in cash with 100 shares of stock outstanding then you could calculate the value of each share of stock as follows.

Stock Valuation Cash Per Share Example

How To Value A Company – Acquiring 20% Ownership Example 2

If that were the case and you wanted to own 20% of the company then how much stock would you have to buy, and how much would it cost?  The answer is that you would have to pay a total of $200 for 20 shares of stock, which can be calculated as follows.

Stock Valuation Ownership Example

How To Value A Company – 10:1 Stock Split Example 3

What if the company did a 10 for 1 stock split, meaning instead of having 100 shares outstanding, it had 1,000 shares outstanding?  Would that change the value of the company?  The answer is no.  The company’s only asset is $1,000 of cash, and no amount of stock splitting (or combining) can change that.  However, by doing a 10 for 1 stock split the value of each individual share is diluted, going from $10 to $1 per share.  So in summary, a stock split affects the value of each share of stock, not the value of the company itself, which can be illustrated as follows.


Stock Valuation Stock Split Example


Now, what if our little company went public and was traded on the New York Stock Exchange?  Wow, that’s big time!  Wouldn’t that would boost its stock price above the $1 it’s now trading at after the stock split?  Not at all!  The stock could be traded on the moon, and that still wouldn’t alter the fact that the total assets of the company are worth $1,000, making the value of each of those 1,000 shares equal to $1.

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How To Value A Company Using The Terminal Valuation Method

But wait, isn’t just focusing on a company’s cash overly simplistic?  After all, there’s no company of any size or consequence whose only asset is cash.  While that may be true, at the end of the day, determining how to value a company is ultimately measured in money (or cash) – nothing else.  This is known as the terminal value of a company.

The application of this concept is known as the Terminal Valuation Method.  To illustrate how it works, say a company’s stock price is trading at a value that suggests the total worth of the company is $10,000,000.[1]  How can you tell if this stock valuation is reasonable?  One way to go about it is by to pretending that the company sold everything off: its inventory, furniture and fixtures, real property, and so on, until it converted all of its assets to cash.  After going through exercise you estimate that upon liquidating all of its assets and settling all of its outstanding debts (or “liabilities”) that the company would end up with $4,000,000.

“It’s Important To Note Stock Valuation Can Vary Greatly Depending On A Number Of Factors Such As: Industry, Maturity Level of Company, Ect.”

What…$4,000,000?  Didn’t we say that the value of the company’s stock suggested that it was worth $10,000,000?  Does this mean that the company’s stock price is vastly over inflated relative to its true worth? Perhaps, but not necessarily.  For example, aside from tangible assets (assets that you can touch) that could be converted into cash, an established company might have valuable intangible assets that would substantially contribute to its ability to make money: established business relationships, a highly skilled workforce, an efficient supply chain, secret formulas and patents, widely recognized brands and trademarks, etc.  In short, there can be a lot more to the value of a company than just its “hard assets” such as cash, inventory, property, etc.

However (and this is a BIG however), if a company is being valued at $10,000,000 and yet it would only be worth $4,000,000 upon liquidation, there still has to be a financial explanation for where that remaining $6,000,000 of value is coming from.  In other words, what is it about the company that makes it worth more than sum of its tangible assets?  If there is a compelling story there – a story that explains how the company’s business prospects, activities and operations are worth an extra $6,000,000 – then the stock valuation of the company can be justified.  If not then the company’s stock price is being pumped up by hype and hot air.


While it’s true that you cannot you cannot fully measure the value of a company based on its hard assets (cash, inventory, buildings, etc.), it’s also true that a company’s value is ultimately measured in dollars.  That means when it comes to a company’s stock valuation, cash is king!


[1] This would be the case if, for example, a company’s stock was trading at $50 a share and there were 200,000 total shares outstanding ($50 x 200,000 shares = $10,000,000).

Actively Managed Funds Vs Index

Actively Managed Funds vs. Index

Index Funds Consistently Outperform Actively Managed Funds

A recent survey once again shows what has long been the case, that index mutual funds consistently outperform actively managed mutual funds (see below).  So if that’s the case then why do so many people invest in actively managed funds?

5 Common Reasons People Fall For Actively Managed Funds

Reason #1 – Ignorance

Some people simply do not understand the long-term performance of index mutual funds handily beats that of actively managed mutual funds.

Reason #2 – Sales Efforts

Firms make much more money off of actively managed mutual funds, often 1%-2% of principle per year vs. 0.18%-0.25% for many index funds.  As a result firms put relentless efforts behind selling actively managed funds (with great success!)

Reason #3 – Greed/Temptation

By definition you can’t beat the market if you’re in an index fund designed to mirror the market.  What are you, some kind of wimp?  And so people pour billions into actively managed funds only to see their returns lag year after year.

Investor Pride – This is a close cousin of “greed/temptation.”  Here’s how the story goes.  Yes, there are lots of lousy actively managed mutual funds out there, but by virtue of your penetrating insight you are smart enough to pick a fund that will beat the market…and that’s how the train wreck begins.

Reason #4 – Fund Manager Pride

So despite the sub-par performance of actively managed funds, show me one that doesn’t have a fund manager that thinks they can be the market every year.  If you can find one then I would love to see what the marketing material looks like, “Invest with us – we guarantee we’ll charge you more and underperform relative to the market in the process!”

Reason #5 – Performance Chasing

Maybe you’ve had a reality check and realize if you’re like most regular you can’t consistently beat the market (but don’t worry, the pros can’t either).  But wait, you don’t have to be smart enough to beat the market, right?  You’ll just find some mutual fund rankings and pick the ones that performed the best last 1-3-5 years, right?  That’s called performance chasing, which is another name for buying high and often selling low (instead of the other way around!).

Low Cost Index Funds are the Best Long-Term Investment Strategy

So what’s the solution?  What’s a good investment strategy for regular people?  Unless you’re able buy stock or another investment at an amount that’s comfortably below the market price (such as pre-IPO stock) then you’re best bet for the long-term is to invest in low-cost index funds (view Best Vanguard Funds for specific recommendations).  It may not get you riches anytime soon but hey, slow and steady worked out pretty well for the tortoise!

How Do Credit Cards Work

How Do Credit Cards Work?

A Credit Card is a Means to Borrow Money

How do credit cards work?  When you boil it all down a credit card is simply a convenient means to borrow money.  In other words, when you use a credit card to pay for something it’s not really you that’s paying for it; the credit card issuer (the bank or financial institution that issued you the credit card) is paying for it.  That means when you use a credit card to make a make a purchase the seller is happy, because they get their money.  However, the transaction isn’t over as far as you’re concerned because now you owe the credit card issuer.  In summary, when you use a credit card you’re borrowing money from the credit card issuer pay for things, and then you’re obligated to pay off your credit card balance.

Payment Options

When answering “How do credit cards work?” keep in mind your credit card issuer obsesses over how much money you owe them.  Without fail every month they’ll send you a statement listing each of your charges as well as any unpaid balance that carried over from the previous month, and then they’ll then offer you payment options.  On the high end you can opt to settle all of your outstanding charges by paying your credit card balance in full.  On the low end you can make the “minimum payment,” the lowest amount the credit card issuer will accept without penalizing you according to the terms of your credit agreement.  Finally, if you can’t pay off your credit card in full but you can make more than the minimum payment then you are free to do so.

Some credit cards will charge you interest starting from the time you make a purchase (I’m not a big fan of these credit cards).  Fortunately, however, most credit cards won’t charge you interest (or “finance charges”) on your purchases as long as you pay your monthly balance in full and on time and you don’t have any carryover charges from the previous month.  Said another way, credit card charges are generally interest free as long as you pay your balance in full and on time. Related Article: Improve Your Credit In 5 Easy Steps.

Credit Limits

How Do Credit Cards Work Credit LimitYour credit limit is the maximum amount of debt that you can charge to your credit card.  For example, if you have a credit limit of $5,000 then you can either make a one-time purchase of $5,000 or you can make a combination of smaller purchases equal to the same amount.  You’re said to have “maxed out” a credit card when you reach your credit limit, meaning that you can no longer make any purchases with it until you’ve paid down your balance.  In other words, if you charge $5,000 one month and then pay your balance down to $4,000 then you charge another $1,000 until you reached your $5,000 credit limit.

Sometimes your credit limit is automatically set by the credit card issuer.  For example, they might say, “Here’s a credit card and, based on your salary, credit history, etc., you can charge up to $5,000.”  Alternatively, you can ask for a certain credit limit when you apply for your credit card (or you can ask for the credit limit to be increased for a card you already have).  Either way, you should not make purchases that would exceed your credit limit.

What happens if you do exceed your credit limit?  First of all, you may not be allowed to in the first place.  Remember, whenever you buy something with a credit card it’s run through a payment processor (or it will be verified online if you’re making an Internet purchase).  Thus if you attempt to exceed your credit limit your purchase may be denied.  However, if you do happen to make charges that exceed your credit limit then your credit card issuer will likely charge you penalties for doing so.

Cash Advances

In a typical credit card transaction you’re paying for things, but you never actually take possession of any cash.  For example, if you use a credit card to buy a computer for $1,000 you never take physical possession of the $1,000; that money is paid directly by the credit card issuer to the computer vendor.  However, in addition to using a credit card to charge purchases, you can use it to get a cash advance.  This can be accomplished in one of three ways.How Do Credit Cards Work Cash Advance

  1. You can use your credit card to get cash from an ATM (contact your credit card company if you don’t know your card’s PIN).
  2. If your credit card was issued by a nearby bank you then you can go to one of their branches in person and get cash directly from a bank teller who will charge it to your credit card.
  3. Finally, you can get a cash advance from your bank in the form of a cashier’s check (but again, it has to be the bank that issued the credit card).

Benefits – How Do Credit Cards Work With Cash Advances?

The benefits of the first two options are obvious; you can use your credit card to actually get cash.  But why would you want to use your credit card to get a cashier’s check?  To illustrate, my wife and I once had a car suddenly die on us.  After some searching I found a used car that we had enough money set aside to pay for.  The problem was that I couldn’t access the money immediately because it was in an investment account, and if I didn’t move quickly I was afraid we might lose the opportunity to buy the car.  To solve the problem I went to the bank and got a cashier’s check and charged it against our credit card.  I then used the cashier’s check to pay for the car.  Finally, after the money from our investments became available a few days later I used it to immediately pay off our credit card.  Thus, by using a credit card to obtain a cashier’s check we were able to move quickly on purchasing the car we wanted (which ironically turned out to be a terrible car…but that’s another story).

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Annual Fees

How do credit cards work with annual fees?  Well, some credit cards charge an annual fee and some don’t.  If that’s the case then why would you ever get a credit card that has an annual fee?  Generally you wouldn’t.  However, some credit cards provide special benefits and incentives, and if the value of those benefits and incentives exceed the cost of the annual fee then it’s worth considering.

What’s In It For The Credit Card Issuer?

How do credit cards work for the credit card issuer?  To have a balanced understanding of credit cards it’s important to know what’s in all of this for the credit card issuer.  Well, if you carry a balance on your credit card then it’s pretty obvious: they’re going to make a financial return of 18%-22% on the money they loaned to you.  Ouch!  But what if you pay your balance in full and on time every month and you never owe any interest?  Does that seem too good to be true?  Are you ripping off your credit card issuer, or is it just that they’re lulling you to sleep, waiting to hit you with some hidden fee or penalty?

Well rest easy, because your credit card issuer is making money when you use your credit card whether you carry a balance or not.  How?  For every purchase you make the merchant has to pay about 1%-3% in credit card fees (and sometimes even more on top of that).  As a result, as long as you use your credit card responsibly and pay your balance in full and on time then both you and your credit card issuer are getting something out of the deal: you get a safe, convenient means to borrow money in the short term and they get steady fees from merchants when you make purchases.  It’s when you carry a balance that things get out of whack, because then you’ll pay exceptionally high interest rates, and if you fall behind then a whole train of penalties and interest will follow as well.

Financial Resources For Improving Your Financial Situation

Managing your funds well throughout these times is of utmost relevance. Individuals are having a hard time making ends consult the raising cost of products as well as the rising interest prices on home mortgage as well as vehicle findings- the honest truth that a number of companies, and economic titans at that, are either folding or minimizing workers.  You can improve your financial situation greatly by using the right financial resources.

Much uncertainty waits for the air in today’s financial scene triggering the need for useful finance assistance not simply for huge financiers yet right to typical individual trying to endure the day-to-day grind. It would certainly seem like employing an individual economist to help you make likelihoods and ends of your present situation would certainly be pricey as well as can perhaps lower your readily available financial sources likewise even more down.

Financial Resources Suitable for Road to Your Economic Success:

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First is investments.  There is no warranty that you’ll generate cash from investments you make. Yet if you obtain the basic realities about saving as well as investing and also adhere to using with an intelligent plan, you should certainly manage to obtain economic security as well as safety and security for several years and also indulge in the benefits of handling your money.

No individual is birthed recognizing exactly how you could conserve or to invest. Every effective investor starts with the essentials. A few individuals might stumble into economic protection – a wealthy loved one might die, or a business may eliminate. For great deals of people nonetheless, the only technique to obtain financial protection is to conserve as well as invest over a lengthy amount of time.

Discover if there is any money that could be spent. If so, then consult with financial resources such as an investment broker to check out if precisely what you need to invest is worth the trip. If it is large as well as it is put appropriately, then perhaps there will certainly suffice to use towards your retirement.

When you obtain your entire ducks right, make sure your tax obligation lawyer or accountant realizes your complete monetary development. They can assist you much better plan for the future by recognizing where you go to the present moment. They can additionally supply you some terrific recommendations relating to the very best ways to proceed in your investments.

Time and again, individuals of also moderate means which begin the quest reach financial security and also all that it assures: buying a home, academic chances for their children, as well as a comfy retired life. If they could do it, so might you.

Savings & Budgeting

Second of all is making to get just your basic needs as well as save as much of your incomes as you can. Include your cost savings in your regular monthly budget strategy. It is likewise a good idea to examine your investing methods and also you will be able to check out where you need to make decreasing or you could possibly source for an additional income. If you use bank card, it is very important to manage your investing. They are hassle-free yet at the same time they can land you into a stack of monetary difficulty.

It is vital that you entirely realized just exactly how it works to make sure that you could utilize it appropriately. If you acknowledge that you could not have the discipline as well as you put on not would such as to carry cash around, you can go with a debit card. It functions merely like cash and has a limit relating to simply just how much you can invest.

How to Invest in Stocks

Learning How to Invest in Stocks 101

Regardless of how many Wall Street films you have seen in the past, stocks and shares is not an easy topic. Those who are searching online for resources on how to invest in stocks for beginners or with little money thinking that they will “certainly” become the next overnight millionaires should, first and foremost, receive a word of warning: Yes, some people can really get rich overnight playing with shares at the stock exchange market; however, but that happens once a blue moon. Every person willing to dip a toe in the world of stocks investment should, at the very least, get prepared first and —as if you were playing chess— think his moves twice beforehand to prevent regrets after.

That being said… How to invest in stocks?

First Things First: Get Informed

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Before spending one penny in a stock market, the first thing you should do is to get informed. Let’s ask a few questions so you can ask yourself if you know the answers:

  • Do you know what a stock is, and how they are currently stored?
  • How many kinds of shares are there, and which of them you can buy?
  • Do you know what a stock broker is? Have you found any for yourself already?
  • Lastly, have you spoken with your accountant about the financial and tax consequences (if any) of becoming a stock investor?

If you do not know the answer to any of these questions, then please let me suggest you the following readings:

  • Investing articles on stocks and the stock market could be a reasonable starting point.
  • The Beginners’ Guide to Investing, by the American Securities and Exchange Commission can provide you a more specific introduction to the topic.
  • Investor’s glossary page can help you clear your doubts.
  • Lists of stock brokers such as this one by Nasdaq can help you find a reputable stock trader for your assets.

Learning How to Invest in Stocks

Next, choose how you will invest in stocks

Once you have covered the basics and feel better informed to start investing, you need to find out a way to do it suitable for yourself and for your money.  There are many options and approaches for this, yet, for beginners, I like to keep things simple. Remember the goal is to make money, and that you have basically two ways to get it with stocks:

  • You either buy stocks to resell them after a short time.
  • You buy stocks to expect a profit sharing payment or resell them after a longer term.

In both cases, your goal will be to make more money from what you invested, a profit.

What are the best stocks to invest in?

The best stocks are on companies or markets you understand, so this answer will depend strongly in your background. Let’s try to make it clear with an example, anyway:

Let’s say someone offers us stocks from an ice-cream company… would you buy them? An uninformed person may go buy them just because “heard” those shares are “about to go up”, and that “it is the exact moment to buy them.” Someone who understands the ice-cream market, however, would pause for a moment and think: Ice-creams are mainly sold in summer. During the winter, their demand falls down. The wisest move would be to buy the stocks in winter, when demand is low and prices go down; and to sell them in spring or at the beginning of summer, when demand goes up and so do prices.

After learning how to invest in stocks, remember knowing the market you are about to invest in will help you get a better understanding of when to buy or sell your stocks.

Certainly, your stock broker should advise you about your investments too.

Financial Management Basics

Proper financial management is arguably the most important skill any business or individual must master in order to be successful in the short term and long term. Anyone responsible for managing their business resources, from freelancers and full time traders to multinational corporations and small businesses, will not last long unless they learn to strategically control optimize their business finances. For individuals looking to create long-term wealth, the same is also true.

What is financial management?

Financial management is more or less what it sounds like: managing your finances. This involves controlling every stage that your financial resources pass through. Financial management therefore includes planning, raising, organizing, controlling, administering and monitoring capital and other financial resources in order to meet the objectives of the business, organization or individual, in the case of personal financial management.

With good financial management procedures in place, your business will be able to use its financial resources effectively and efficiently towards short-term and long-term goals, ensure long-term financial stability and sustainability, and gain an edge over your competitors in the same niche.

Basic elements of financial management

Proper financial management can be loosely broken down into these four basic elements:

  • Financial strategy
  • Revenue plan
  • Financial management system
  • Internal financial management environment

Developing a good financial strategy

Your financial strategy is basically a highly specific plan to get you and/or your business from where you are now to where you want to be. A good financial strategy must realistically examine your current financial situation and any relevant factors influencing that situation; otherwise, you will have no way of knowing what needs to be done to reach your objectives.

Speaking of objectives, you also must have clearly defined goals for the short term and the long term. Without a specific and well-articulated idea of where you want your business to be, and over what time-frame, you won’t be able to create a successful plan to get you there.

“How to get you there” can be fleshed out in the second element, your revenue plan. But it also must involve considerations like the potential risks your business will face, and how you will deal with those risks, as well as how to balance your need to continually spend and reinvest in your business with the very real need to have a savings plan.

Creating a solid revenue plan

Hopefully you already have at least a vague idea of how you plan to generate income. This will be vastly different for everyone depending on the field of their particular business or organization. The point is, without income, your business can’t grow, and you will have an easier time bringing in that revenue if you have a plan of action ahead of time.

Basics of financial management systems

Like your revenue plan, your financial management system will depend on your particular business or organization, but there are a few principles that are universally important for a successful financial management system, including consistency, accountability, integrity, and good record keeping.

A good financial management system will help take some of the guesswork out of decisions that involve how to best use your (often limited) resources. It involves tangible things like creating reasonable budgets and deciding where to allocate your capital, and also more abstract concepts like reflecting on whether the system makes it easier to make these decisions effectively, keeping your business’ financial goals in mind and putting them in the context of your financial management system.

Create an effective internal environment for financial management

Lastly you need to determine the various roles and responsibilities that are needed to effectively and consistently implement your financial management system, who will be responsible for each of these tasks, and how they will work cohesively towards the business’ common goals.