How To Effectively Manage Your Small Business Finances effectively:
- Create a 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
- Make wise 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.
Notwithstanding the difficulties you might have raising business capital, it is your responsibility to raise your business capital.
Beyond that, it is also your responsibility to ensure that you manage your business capital effectively to enable you build, manage and grow your business.
In other words, you require sound financial discipline keep your business running at optimal levels.
This article, therefore, is focusing on financial management strategies that have been tried and tested, over time, that can help you to manage your small business finances effectively.
Manage Business finances: Create A Cash Budget
Cash budget is one of the most important and effective strategies you can use to manage your small business finances.
You should prepare cash budget to track the incomes and expenses of your business.
A cash budget can be prepared for any given period; quarterly, biannually or annually depending on the needs of your business.
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, among others:
- Money received from sale of goods or fixed assets,
- Interest, dividends and rents received or receivable
- Grants and subsidies from governments
- Proceeds from sale of investments
- Loans received
- Cash expected from debtors
- Donations from all sources, and
- all monies due to your business
The expenditure side can include, among others:
- Investments of all kinds
- Payments to creditors
- Repayment of loans and interests
- Purchase of fixed assets
- Purchases of Stocks and inventories
- General business expenses
- And lots more
Furthermore, there are many benefits of preparing cash budget for your business.
Cash budget can help you in many ways, including:
- To track your business incomes and expenses
- Prevent reckless spending of your business finances
- Plan how and when to collect your money from debtors
- arrange when and how to pay your creditors
Moreover, cash budget will help you to ensure that your business finances are managed in a responsible manner.
Furthermore, it can help you to minimize the chances of you being caught unaware when some unexpected business expenses come knocking.
Therefore, you should give priority attention to effectiveness and efficiency in the management of your business finances.
Manage Business finances: Avoid Credit Sales
You need to avoid selling your goods on credit to customers.
There are many disadvantages of selling your merchandise on credit basis. The following are just a few of them:
- You will tie down your capital in the hands of customers
- It will affect your working capital
- Your cash flow will also be affected
- Some debtors will not pay you as at when due
- Others customers can just deliberately refuse to pay you
- Others can simply relocate to avoid you.
- There will be no money to replenish stocks when they get low
- You can end up with bad debts that are usually written off to the profit and loss account.
Furthermore, credit sales can actually make you lose customers. This is because some customers, instead of paying you, will avoid you by taking their businesses to your competitors.
Therefore, your policy should be “buy things that you can pay for (also known as cash and carry) “.
Set credit limits for customers
You should set credit limits for important customers.
In business, it is not so easy to implement the no cash no sales policy.
In other words, you might need to be flexible when managing the no cash no sales policy.
However, credit limit should only be approved for customers with proven integrity and track records of doing business with you.
Furthermore, customers that have hit credit limits should not be allowed further supplies until they have paid in some money to reduce their debts.
Most importantly, you should constantly track the performance of your customers against the set credit limits.
This is important to ensure that you protect your business while keeping your esteemed customers.
Manage Business finances: Bad Debts
Bad Debts stem from selling goods to customers on credit basis.
In other words, Bad debts are by-product of credit sales.
Some customers may be unable or unwilling to pay you for goods supplied to them.
Others might relocate and go away with your money, thereby creating debts you might not be able to recover.
Still, some customers might pass on, leaving you unpaid.
Furthermore, bad debts can affect your business in several ways, including:
- Bad debts affect your working capital,
- They are written off to the profit and loss accounts
- Bad debts reduce your profits
- Can make your business operate at a loss
- They affect the growth of your business.
- Bad debts can affect your cash flow
- And can lead to court actions
Selling goods on credit to customers is the fastest way to wreck your business.
Therefore, you should ensure that, as much as possible, all sales must be on cash and carry basis.
Set up internal controls
You should put in place effective and efficient internal control systems for your business.
Internal control systems will help you to:
- ensure proper tracking of 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 install an effective internal control systems.
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 for you to reduce 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”?
Areas where you can reduce operating expenses include, among others:
- Transport and traveling expenses
- Vehicles fueling and maintenance expenses
- Office expenses
- Stationery and lots more
Furthermore, you need to take a hard look at all your business expenses.
This can enable you to identify those expenses that are eating deep into your margins.
In other words, you should avoid expenses that do not add value to your business.
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 integral part of the annual financial statements that 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 now, there is no better time than now to start.
Before You Make purchases
To help you manage your small business finances effectively, you need to:
- Learn and develop active listening skills
- able to negotiate intelligently
- have foresight
- know your market
- understand your competition
- know what your customers need
- and be good with figures.
Additionally, before you buy anything at all, you should obtain quotations from, at least, three suppliers.
This can enable 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 form your first profits even when you have not sold!
Therefore, you should be able to negotiate favorable terms with suppliers before you make purchases.
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.
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.
Placing yourself on a monthly salary is one of the ways that can enable you to know the actual cost of running your business.
Most importantly, you should distance yourself from your business finance.
Open personal account
Before you can get down to the process of managing your business finances, you need to separate your personal account from your business account.
First, separating your business and personal finances is essential for organizational and tax reasons.
By keeping these finances separate, you’ll have a much easier time managing your bookkeeping and requirements when it comes to business taxes.
Perhaps more importantly, however, separating your business and personal finances has legal implications. When you separate your finances in this way, your personal finances are then protected if you were to ever face legal trouble with regard to your business.
Manage Business Finances: 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 has 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
- And splashes business funds at will in parties and ceremonies.
Consequently, his businesses began to crumble like a pack of cards one after the other.
Therefore, you should not spend your small business finances recklessly because the business belongs to you. And because you are not accountable to anybody.
Leave your small business finances alone. Let the business grow.
Manage business Finances: Making Financial decisions
You need to be able to make sound business and financial decisions.
Remember that poor decision making will invariably result in unsatisfactory outcomes.
The following tips can help you to make valid decisions:
- For simply 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.
Most importantly, you should not make hasty decisions. Hasty decisions can result in costly mistakes. And costly mistakes can hurt your 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 idle cash in short term securities.
Short term securities include:
- Ordinary Shares
- Money markets funds
- Mutual Funds
- Government bonds
- and many more
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 your business 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 a 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 that can improve your financial well being.
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:
- have multiple income streams
- drive more sales
- Make more 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.
Manage business finances: 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.
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.
So that at the end of the year, a little profit from here and there can improve your bottom line.
Keep Accounting Books and records
You should make sure that you keep accurate accounting books and records for your small business expenses
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
- compare your business performance this year against that of the previous year
- compare the performance of your business with other 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 should get an accountant to prepare annual financial statements for your small business.
If at any time along the line, you have problems, you can feel free to look outside for people with expert advice.
Sell off unused assets
You will need to sell assets your business has not used in the last six months.
If you have not used them because they were broken down and that your business still need them, you can then 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 result in your business experiencing negative cash flow.
As Benjamin Franklin aptly put it “if you fail to plan, you are planning to fail”.
You should, therefore, develop an action financial plan for at least 5 years.
The blueprint in the financial plan can help you to match your business results with set goals.
Establish emergency fund
To enable you manage your small business finances effectively and efficiently, you should 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 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 money. 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.
You should read materials relating to your industry. Some trade associations publish periodic journals or magazines.
Therefore, you should look out for access to such publications to enable you remain competitive and trendy in your industry.
Increase customer base
Going forward, you can also go on customer drive to enable you to secure more customers and hence increase your sales and profits.
Thus, if you have many customers who buy from you regularly, your business will grow and you will be better for it.
Price to drive sales
Your pricing policy can make or mar your business. This is because if you price too high, you will scare aware your customers. Conversely, if you price too low, you run the risk of operating at a loss. That you do not want.
You should therefore, watch industry trends and the prevailing market prices to enable you stay at an optimal position.
Time your purchases
You are in business to make profits. Some items sell at specific times of the year.
Examples are merchandise relating to Christmas season.
Therefore, you should be foresighted and smart enough to time your purchases to coincide with Christmas and any other important seasonal sales.
Manage manage your stocks
In many businesses, inventory/stock take a large chunk of your business capital.
Furthermore, you should not overstock so that you don’t have to tie down a large amount of your business finance on goods that will be gathering dust in one side of your store.
Most importantly, you should not under-stock so that you can retain existing customers and get new ones.
Therefore, you need to pay special attention to your stocks/inventory so that you do not allow smart guys to play a fast one on you.
By Samuel Ijenhi
B. Sc. Accounting (University of Benin)
Benin City, Nigeria