How To Manage Small Business Finances Efficiently


This article shows you how to  manage small business finances efficiently:

  • Create a cash budget
  • Reduce Credit Sales
  • Set Credit Limits for Customers
  • Reduce Business Expenses
  • Expand your business activities
  • Invest surplus cash
  • Branch into other businesses

Create A Cash Budget

One of the important tips on how to manage small business finances efficiently is for your to prepare a cash budget.

The cash budget should capture all your business incomes and expenses for any given period of time.

A cash budget is an estimate of how cash should flow in and out of your business during a given period of time usually one year or less.

Furthermore, cash budget can be prepared for even the smallest of businesses.

You do not to be a certified accountant before you can prepare a simple cash budget.

However, if you cannot do it yourself, for a little fee, you can hire a bookkeeper to prepare one for you.

All you to do is to give him all the details he will need to prepare the cash budget. Remember that you must give him correct information to enable him do a good job for you.

Purpose Of Cash Budget

The main purpose of a cash budget is to enable you:

  • To take into account your incomes and expenses from all sources
  • Help you to plan how to collect your money from debtors
  • To manage your business finances in a responsible manner
  • When and how to pay your creditors (the debts your business owes).
  • It should help you to meet your business financial obligations as at when due
  • To help to develop financial discipline which you need to succeed in your business

Structure of Cash Budget

Typically, a cash budget is made up of two parts: Income Side and Expenditure Side.

Income Side

The income side should capture all incomes from all sources that should flow into your business during the budget period.

Examples of cash inflows should include, among others, money from sales of goods or sale of fixed assets, money received from sale of investments, interest, dividends and rent received.

Others could be loans received or expected , grants and money expected from debtors.

Expenditure Side

This side of the cash budget should show all your business expenses, including investments, loan and interest repayments. Others include purchase of fixed assets, stocks and general business expenses.

Please note that the list on either side of the cash budget is not all that  could be found in a cash budget.

The items you include in this section should depend on the nature of your business and the  practices in your line of business.

Reduce Credit Sales

Another tip on how to manage small business finance is to avoid credit sales to customers. This is because some dishonest customers  could just start to buy and pay regularly. But  a point they could buy large quantities of stocks from you on credit and will never come back to your shop again.

They will continue to buy from another seller, thereby avoiding you because they do not want to pay.

Selling goods on credit to customer can easily kill any business, especially small businesses.

The side effect of selling on credit is that you will not  have money to replenish your stocks when they get to low levels. Furthermore, credit sales can actually make you lose customers.

In addition, credit sales can put huge pressure on your cash flow and your working capital.

To enable you manage your small business finances efficiently , it is best to avoid credit sales. Instead, sales should be on cash and carry basis. Period!

Set Credit Limit For Customers

Yet another way to help you manage small business finance effectively is for you to set credit limits for some of your major customers.

Customers should not be given further supplies until they have paid in some money to reduce their debts to the credit limit you have set for them.

Furthermore, You should set different credit limits for different customers, depending on the volume of business they do with you and their track records.

Bad Debts

Bad Debts often arise from customers who are unable or who refuse to pay for goods you supplied to them.

Bad debts are sources of loss to your business because when they fail to pay, bad debts should be written off to the profit and loss account at the end of the year.

It reduces your profits for the year. Therefore, credit sales kill small businesses fast.

The reason is that some dishonest customers may delay or even refuse to pay you for goods you supplied to them.

Consequently, you are likely to carry a large amount of bad debts in your accounting books.

Therefore, you should review your customers debt profiles from time to time to enable you reduce the risks of bad debts.

Reduce Business Expenses

Another useful tip to help you manage your small business finances efficiently is for you to cut back on some wasteful business expenses. The rule is that you should Increase Revenue and Reduce Expenses.

Areas where you can make savings include reducing your travelling expenses, vehicle running costs, entertainment and so on.

Therefore, you should learn to say no to some invitations and ceremonies. Ask yourself: “if I accept the invitation or reject it, what do I stand to gain or lose”?

You should take a hard look at all your business expenses in order to identify those expenses that are eating deep into your profits.

The best place for you to do this is your profit and loss account, if you have one.

Keep only those business expenses which are necessary for the business to run smoothly.

Therefore, you should prune down other expenses to the level where they will not have significant impact on your profits.

Most importantly, you should identify and weed out those expenses which do not add value to your business. Related: How To Manage Insufficient Capital In Business.

Before You Make purchases

To help you manage your small business finances efficiently, you need to have a good listening skill. You also need to have a good negotiating skill.

Before you buy anything at all, you should try to obtain quotations from at least three sources so that you can compare prices. Plus do not be  shy or proud to price whatever you need to buy.

Place yourself on monthly salary

Yet another way that should help you to manage your small business finance efficiently is for you to place yourself on a monthly salary.

A monthly salary of  say 10% of the annual profits of the business should be ideal.

Most importantly, it is only when you have the gut to implement this policy that you will be able to tell whether or not your business is doing well.

You should not just pounce on business finance and begin to blow it because the business belongs to you.

For example, I know a wealthy man who has chains of businesses but lacks financial discipline. He would just walk into any of his businesses and collect money from the cashier or accountant without signing for the money. No records. No accountability.

The consequence is that his existing businesses are folding up as fast as he is incorporating new ones.

In fact you should see yourself as “employee” of the business rather than the boss. Therefore,you should take active involvement in managing small business finances but must distance yourself from spending small business finance. Let the small business finances alone.

Making financial decision

When managing small business finances, making decisions can be quite challenging.

However, decisions must still be made. When you are faced with the problem of making moderate decisions you should apply the rule of 24. That is 24 hours to figure out a good decisions.

On the other hand, if the decision is of a difficult nature, you should apply the rule of 72; that is 72 hours to think and work out a workable decision.

However, if the problem proves to be beyond your ability, you should seek advice from your mentor or an expert in the area of decision you want to make.

Invest Your Company Surplus Cash

If your business has accumulated some idle cash over time which you are not ready to use anytime soon, you should invest such funds in short-term securities in profitable companies.

Short term securities, such as ordinary shares, are investments you can easily sell at short notice.

Besides, if you do not sell them before the end of the year, you will receive dividends that may be higher than what the banks will pay you as interest.

In addition to the dividend, if the company has a large share premium reserves it can issue you bonus share certificates. They are called bonus because you do not pay for them. They also rank for dividends at the end of the

It does not make any economic sense to leave your cash in the coffers of banks which give you little interests periodically. But they collect huge interest rates from borrowers.

Expand Your Business Activities

Small businesses are more exposed to shocks in the business world than big companies.

Therefore, if you have some reserves, you should use such funds to increase the scope of your present business so that you can make more profits.

By expanding your business, you will not only improve your profits, you will be able to give back to society by creating jobs for people.

However, you should expand wisely so that you will not find yourself in liquidity problems.

If you are in doubt as to how best to go about expanding your business, seek consultation with those who have been there before you.

Branch Into Other Businesses

Another way you can manage small business finances efficiently is for you to diversify your business interests to other areas of the economy so that you will be getting multiple streams of incomes.

In other words, since the business world is full of risks and uncertainties, you should not lay all your eggs in one basket. You do want to fall flat on your back face up when the unexpected happens.

In conclusion, remember that business is not a bed of roses. You must work hard and avoid being lazy about keeping financial records. If you cannot do it yourself, hire a bookkeeper on part-time basis.

Records keeping will enable you to manage your small business finances efficiently. The stats you get from your financial records should help you to make informed business decisions that should move your business forward.


By Samuel Ijenhi





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