22 Ways To Manage Business Finances Effectively

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There are many ways to manage business finances effectively.

Business finance may be defined as money set aside for the sole purpose of starting a business.

It is, therefore, your responsibility to ensure that you manage your business capital effectively to enable you build, manage and grow your business successfully.

For you to achieve this goal, you need to have sound financial discipline to keep your business running at optimal levels.

This article, therefore, is focusing on some financial management strategies that can help you to manage your business efficiently.

Business Finances: Cash Budget

Preparing cash budget is one of the most important and effective strategies you can use to manage your small business finances.

The beauty of cash budgeting is that it will enable you to track all your incomes and expenses in a coordinated and responsible manner.

A cash budget can be prepared for any  period of time; quarterly, half yearly or annually, depending on the needs of your business.

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

Income Side

The income side can contain all the monies that you expect will come into your business during the period.

Examples can be money received from:

  • Proceeds from sale  of fixed assets
  • Sales of your products
  • sale of investments
  • Dividends, interest and rents received
  • Payment by debtors, and
  • So on.

Expenditure Side

Expenditure can contain all the payments you expect to make during the budget cycle. Examples are:

  • Rents
  • Salaries and wages
  • Investments
  • Purchases
  • and lots more

Cash budget will enable you to ensure that all your incomes and expenses are captured so that nothing is left to chance.

Another advantage is that it will prevent the possibility of being caught unaware when some business expenses pops up.

At the of the budget, you need to deduct the expenditure from incomes.

The balance will disclose your spending pattern and will also help you to review your expenses.

Most importantly, cash budget will help you to make sure that you manage your business finances in a more responsible and efficient manner.

Avoid Credit Sales

You should not sell your goods on credit to customers.

Selling goods on credit to customers is one of the fastest ways to mess up your business finances

And it could even lead to business failure.

However, it sometimes not altogether easiy to enfore the “cash and carry basis”.

This is because you might have some valuable customers and you will need to be flexible in dealing with them.

Additionally, the way to go around this is to set credit limits for such select customers.

Consequently, all such customers should their accounts flagged so that you can control the performance of their accounts.

Furthermore, customers that have hit credit limits should not be allowed to get further shipment until they have paid in some money to reduce their debts.

Most importantly, you should constantly monitor the compliance level of the credit limit policy to ensure that the aims are not defeated.

Business Finances: Bad Debts

Bad debts stem from selling goods to customers on credit basis. Basically, they are the result of selling goods to customers on credit.

Bad debts can occur because:

  • Some customers may be unable or unwilling to pay you for goods you supplied to them.
  • Others might relocate and go away with your money.
  • Still, some customers might pass on, leaving their bills unpaid.

Selling goods on credit ccan have some undesirable consequences on your business, including:

  • Bad debts affect your working capital,
  • It can reduce your profits
  • Creates inability to meet customer needs because of stock outs
  • They affect the growth of your business.
  • Bad debts can affect your cash flow
  • And can lead to court action

Therefore, you should ensure that, as much as possible, all sales must be on cash and carry basis.

Business Finances: Set Up Internal Controls

You should put in place effective and efficient internal control systems for your business.

Effective internal control systems can help you to:

  • Track your stocks and cash.
  • Block all existing or potential leakages in your business
  • Ensure that all your business transactions are done, using due process

If you have an accountant, he can help you to design and implement effective internal control systems to ensure that can help your business to run optimally.

However, if you do not have an accountant, you can seek help from outsiders.

Reduce Business Expenses

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

The rule should be: “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”?

Furthermore, there are many areas of your business where you can curtail costs. Examples are:

  • Transport and traveling expenses
  • Vehicles fueling and maintenance
  • Entertainments
  • Office expenses
  • Stationery and lots more

Furthermore, you need to take a hard look at all your business expenses.

This can help you to identify those expenses that are eating deep into your margins.

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

The Profit and loss account is an important part of the annual financial statements that you need to prepare for your business.

Typically, annual financial statements  for small businesses are made up of:

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

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

Before You Make Purchases

You need to do due diligence before you make any purchases.

This is necessary because you can loose money by making wrong or unnecessary purchases.

Furthermore, you must be able to:

  • Negotiate intelligently
  • Have foresight
  • Know your market
  • Understand your competition
  • Know what your customers need

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

This can help you to compare prices and to ensure that you are buying quality and durable items your customers will be willing and able to put their money.

Most importantly, you should not be shy or proud to ask for trade and cash discounts.

This is because, trade and cash discounts can form part of your first profits even when you have not sold!

Business Finances: Place Yourself On Salary

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

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

Unarguably, this is the tipping point for many small business owners like you.

You should not see yourself as the “boss”.

Rather, you should see yourself an “employee” of the business.

Most importantly, you should distance yourself from spending business finances for things that do not add value to your business.

Director’s current account

You need to create a Director’s current account.

Opening a Director’s account will enable you manage your business finances responsibly.

Furthermore, it will give you a better picture of understanding how your business is going.

For example, if you take good for your personal use and you have not paid, this fact must be recorded in this account.

Most importantly, separating your personal expenses from business expenses will enable you to know the actual cost of running your business.

Director’s Capital Account

Similarly, you need to credit Director’s capital account.

The account will state your initial investment in the business.

Additionally, if you introduce more money into the business, it will be reflected in this account.

Be Prudent In Spending

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

For example, I know an entrepreneur who had chains of businesses that failed one after the other.

His businesses began to fail because he:

  • Could just go to any of his companies, collect cash and leave
  • Did not believe in keeping accounting books and records
  • Would owe workers several months of unpaid salaries

He honored every single invitation and ceremony where he splashed business funds recklessly.

Consequently, his businesses began to crumble like a pack of cards.

Therefore, you should not spend business finances recklessly because the business belongs to you and that you are not accountable to anybody.

Making Financial Decisions

You need to be able to make sound business and financial decisions.

Remember that poor decision making process will invariably result in unexpected outcomes.

The following tips can help you to make good business decisions:

For simple, decisions, you can use the rule of 24. You can use 24 hours to think and work out a workable decision

For fairly difficult decisions, you can spend 72 hours to think and work out an optimal decision.

And for very difficult decisions, you can seek help from an expert in the area of decision you want to make.

More importantly, you should not make hasty decisions.

Most importantly, hasty decisions can result in costly mistakes. And costly mistakes can hurt your business finances.

Manage Business Finances: Invest Idle Cash

If your business is prosperous and you have some reserves that you are not ready to use any time soon, you can invest such idle cash in short term securities.

Short term securities include:

  • Ordinary Shares
  • Money markets funds
  • Mutual Funds
  • Government bonds

Short term securities are investments that you can easily buy or sell.

They are securities you can easily realize in a matter of few days.

Moreover, investing idle cash can help you to have multiple streams of income.

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 that can improve your financial well-being.

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

Expand Your Business

If you have the resources, you can expand the scope of your business activities.

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

By expanding your business, you will be able to:

  • Earnadditional incomes.
  • Drive more sales
  • Increase your profits
  • Meet customers’ needs
  • Grow your business
  • Fight competition

Furthermore, you can 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 businesses

In other words, you should diversify your business interests.

That is to say, you should not lay all your eggs in one basket.

Most importantly, branching into other business with less competition will enable you to make quick profits before competitors move in.

Hopefully, at the end of the year, a little profit from here and there can improve your bottom line.

In all cases, you need to do costs and benefit analysis before you make financial decisions.

Keep Accounting Records

You should make sure that you keep accurate accounting books and records for your small business expenses

Keeping accurate accounting records can help you to prepare annual financial statements for your business.

Furthermore, annual financial statements can contain important stats you need to:

  • Make better business decisions based on facts and figures
  • Know the direction your business is going
  • Compare your business performance this year against that of the previous year
  • And with similar businesses in your industry.

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 can get an accountant to prepare annual financial statements for your small business.

Sell Off Unused Assets

Another way you can manage your business finances efficiently is for you to sell off all assets your business has not used in the last six months.

Proceeds from such assets can help you to improve your working capital.

Moreover, it will reduce the presure on your cash flow.

If you your business still need them, only that they are costing you a lot of money to maintain, you can trade them into new ones.

This is perfectly in order.

Recover Outstanding Payments

You should collect any money you have outstanding with customers.

If need be, you can even get agents to collect the money from them.

You can work out a sort of commission for them based on the money they are able to collect.

Most importantly, leaving your cash with customers can stand in the way of success of your business.

You should, therefore, develop an action financial plan for at least 5 years.

Establish Emergency Fund

To enable you manage your small business finances effectively and efficiently, you can  set up an emergency fund you can fall back on when the unexpected happens.

Furthermore, it is not good to be caught unaware each time emergency expenses show up.

Therefore, you need to save for a rainy day.

Pay Off Debts

Huge debt burden can stand in the way of your business growth.

This can be really disturbing if you have to pay simple interest or compound interest on some of them.

You should, therefore, endeavor to pay off all your business liabilities so that your business can operate smoothly.

Use Your Own Money

As much as possible, you should use your own personal money to do business.

In other words, you should not borrow money from the bank to do your business because of high interest charges.

Interest charges on borrowed money can hurt your business before it even has any chance of succeeding.

Related: 10 Ways Poor Financial Management Can Hurt Your Business

 

By Samuel Ijenhi

B.Sc. Accounting, (University of Benin)

Benin City, Nigeria.

info@samuelijenhi.com.ng

About Samuel Ijenhi

A graduate in Accounting, University of Benin, Benin City, Edo State, Nigeria.
View all posts by Samuel Ijenhi →