16 Most Effective Ways To Manage Your Small Business Finances


This article shows you the 16 Most Effective Ways To Manage Your Small Business Finances.

  • Create a cash budget
  • cash Budget cycle
  • Purpose of cash budget
  • Avoid Credit Sales
  • Set Credit Limits for Customers
  • Reduce Business Expenses
  • Before you make purchases
  • Place yourself on monthly salary
  • Be prudent in spending
  • Making financial decisions
  • Invest Idle cash
  • Expand your business activities
  • Go into other businesses
  • Keep accounting books

Business finance may be defined as money raised with the sole purpose of starting a business.

In other words, it is the startup capital of your business.

Often times, managing business finance can pose daunting challenge to many people.

However, notwithstanding these obvious challenges, business must business must keep running.

Therefore, there is every need for you to always track your business finances.

The following tips should help you to know the various strategies you can use to manage your business finances.

Business finances: Create A Cash Budget

Cash budget is one of the effective strategies you can use to manage your small business finances.

Firstly, cash budget will enable you to track all the cash which you expect should flow into your business during the budget period.

Similarly, it should enable you to take into account all the expenses of your business during the period.

Budget time cycle

Cash budget is usually prepared for a time period of one year.

However, it can also be prepared for a longer or shorter period.

The time period you choose should depend on the needs of your business.

Structure of cash budget

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

For example, the income side might include items such as the following:

  • Money from sale of goods or fixed assets,
  • Interest, dividends and rents received or receivable
  • Grants and subsidies from governments
  • Cash expected from debtors
  • Donations from all sources
  • and lots more

Conversely, the expenditure  side should include expenses such as:

  • Investments of all kinds
  • Repayment of loans and interests
  • Purchase of fixed assets
  • Purchases of Stocks and inventories
  • General business expenses
  • And lots more other expenses

Purpose Of Cash Budget

The following are the advantages of preparing cash budget:

  • To avoid reckless spending of your business finances
  • Avoid disappointing  creditors
  • Enable you to make and keep your promises
  • Improve your integrity and credit rating.
  • manage your business finances in a responsible manner.
  • Plan how to collect your debtors
  • plan when and how to pay your creditors
  • Improve your cash flow

Business finances: Avoid Credit Sales

Another tip on how to manage your small business finances is to avoid selling goods to customer on credit basis.

The disadvantages of selling your products on credit basis are as follows:

  • You will tie down your capital in the hands of debtors
  • It will affect your working capital
  • Some debtors will not pay you
  • Others may not pay as at when due
  • You will not have money to replenish stocks when they get low.
  • Furthermore, credit sales can actually make you lose customers
  • Some debtors instead of paying you will take their business to your competitors

To enable you manage your small business finances efficiently, you should sell on cash and carry basis. Period!

Set Credit Limits

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

By this method, you need to review the track records of your major customers.

You should set credit limits for customers who have proved themselves to be credit worthy.

Credit limit should only be approved for customers with proven integrity and track records of doing business with you.

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

Most importantly, you should constantly review the performance of customers against the set limits.

Business finances: Bad Debts

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

The disadvantages of credit bad debts are as follows:

  • Bad debts affects your working capital,
  • They are written off to the profit and loss accounts
  • Bad debts reduce your profits
  • It can result in your business making losses
  • Bad debts make it difficult for your business to grow.
  • it  affects your cash flow
  • Makes it difficult for you to keep your promises

Therefore, you should ensure that there is effective internal control over sales, stocks and debtors’ accounts are closely monitored.

Reduce Business Expenses

Another useful tip to help you manage your small business finances efficiently is for you to reduce your business expenses.

The rule is that you should “Increase Revenue and Reduce Expenses”. 

For example, if you receive any invitation ask yourself: “if I accept or turn down this invitation, what do I stand to gain or lose”?

You can also reduce your expenses in the following areas:

  • Transport and travelling expenses
  • Vehicles fueling and maintenance expenses
  • Entertainments
  • Office expenses
  • Stationery
  • Expenses that do not add value to your business.

You should take a hard look at all your business expenses.

This should enable you to in identify those expenses that are eating deep into your margins.

Moreover, the best place for you to do this is the profit and loss account of your business.

If you have not been preparing Profit and Loss Account before now, there is no better time than now to start to preparing annual financial statements for your small business.

Annual financial statements is made up of:

  • Trading Account
  • Profit and Loss Account and
  • Balance Sheet

Before You Make purchases

To help you manage your small business finances efficiently, you need to have:

  • a good listening skills
  • negotiation skills

Additionally, before you buy anything at all, you should obtain quotations from at least three suppliers.

This should enable you to compare prices and the qualities of the products you want to buy.

Most importantly, you should not be shy or proud to ask for discounts, favorable payment terms and other incentives before you make a purchase.

Place yourself on monthly salary

Still another tip that can help you to manage your small business finance efficiently is that you should place yourself on a monthly salary.

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

To be able to this, you should see yourself as “employee” of the business rather than the boss.

Placing yourself on a monthly salary is one of the ways that enable you to know how your business is going.

Business Finances: Be prudent in spending

You should not spend your small business finances on things that do not add value to your business.

For example, I know an entrepreneur who has chains of businesses.

His businesses began to fail because he:

  • could go to any of his companies, collect cash and leave
  • did not believe in keeping accounting books and records
  • would owe workers months of unpaid salaries
  • learn to turn down invitations and ceremonies
  • vehicle running and maintenance expenses
  • never believed in records keeping

Most importantly, you should not spend your small business finances recklessly because the business belongs to you.

Leave your small business finances alone. Let the business grow.

Business Finances: Making Financial decisions

Managing your small business finances can be quite challenging at times.

For example, you need to make some important financial decisions.

The following tips might be helpful to you:

  • For simply decisions,you can use 24 hours to think and work out a workable solution
  • For moderate decisions, you will need say 72 hours to figure out a solution
  • And for very difficult decisions, you can seek help from an expert in the area of decision you want to make.

Most importantly, you should not make hasty decisions. Hasty decisions can result in costly mistakes.

Invest Idle cash

Investing your idle cash in good securities is one of the ways you can manage your small business finances.

If your business has some idle cash which you are not ready to use any time soon, you shoud invest them in short term securities:

  • Ordinary Shares
  • Government Bonds
  • Mutual Funds
  • and many other available investment options

Short term securities are investments that you can easily buy, sell and get your money in a matter of days.

Moreover, investing idle cash should enable you to have multiple streams of income.

However, before you invest your small business finances, you should seek advice from a stock broker, an accountant or lawyer.

Do not leave a large sum of money in a savings account. Your money in a saving account cannot grow or give you the type of returns you would want.

Expand Your Business 

To manage your small business finances efficiently, you can also expand the scope of your business.

This you should do especially if there is good demand for your products or services.

By expanding your business, you  will be able to:

  • drive more sales
  • profits
  • meet customers’ needs
  • make your business grow
  • fight competition

Furthermore, you will be able to give back to your host community by creating jobs for the jobless.

Go Into Other Businesses

Another way you can manage your small business finances  is for you to go into other business.

In other words, you should diversify your business interests.

You do not need to lay all your eggs in one basket.

Moreover, going into other businesses will let you have multiple streams of income.

Furthermore,  you should not lay all your eggs in one basket.

Most importantly, diversification should enable you to have multiple streams of incomes.

So that at the end of year, a little from here and there should improve your bottom line.

Keep Accounting Books

You should make sure that you keep accurate accounting books and records.

Keeping accurate accounting books and records should enable you to prepare:

  • Trading Account
  • Profit and Loss Account
  • And Balance Sheet

Furthermore, the above accounts should enable you to:

  • Make better business decisions based on facts and figures
  • Know the direction your business is going.

If you cannot do it yourself, hire a bookkeeper on part-time basis to keep your financial records for you.

At the end of each year,  you should get an accountant to prepare annual financial statements for your small business.

If at any time along the line, you have problems any problems, you should feel free to seek advice from financial experts.

Related: 9 Best And Most Effective Ways To Prevent Business Failure


By Samuel Ijenhi








About Samuel Ijenhi

A graduate in Accounting, University of Benin, Benin City, Edo State, Nigeria.
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