Once a business gets operational, the most difficult challenge for a small business owner is managing the money.
While starting your business, you might have secured good seed capital, but the challenge lies in how well you are going to protect and make use of the money. There are a lot of instances where you’ll be making unnecessary investments or spend excessively. And when there is no good money management strategy, your business will definitely fail.
It’s a common rule for businesses of all sizes, to analyze how much you are earning Vs how much you are spending.
Entrepreneurs and small business owners should be stricter and be obliged to this rule. It’s common sense. During the initial years of your business, you ought to spend less and work more towards generating revenue.
That means you should have more control over your finances and for the reason, your money management practices should be good.
What are some of the Best Money Management Strategies for your Small Business?
Prepare a Budget & Stick to It
How will you manage money, when you don’t have an idea about how and why your cash is going out?
Only when you plan your spending, you’ll get a clear idea about how much you can reduce the unnecessary expenses. This planning you do is budgeting. Often, business owners blindly start their business operations without a budget just because their cash reserve is heavy.
They do not mind spending unnecessarily until they face cash problems. By that time they realize this, it’ll be hard for them to trace where exactly their money was spent and how.
It’s obvious you cannot reverse your actions.
However, you can plan your actions and avoid such consequences.
Now, remember this carefully. Know that this formula will materialize only when you stay within the budget.
Creating a Budget ≠Money Management
Tips to stay within Budget
- Don’t use a business credit card, you’ll spend more. Instead, use a business prepaid card.
- Create employee expense policy – (Design) for the T&E program.
- Avoid Impulsive purchases.
Make Cash Flow Management your Top Priority
One of the vital elements to run a business is cash. Basically, under financial terms, a business will deal with two types of cash flow.
- Positive Cash Flow
- Negative Cash Flow
Running a business is not easy, especially, if you have a thin budget. You have to manage between accounts payable and accounts receivables. If your clients/customers are paying you on-time and the sale numbers are good, then your business is experiencing positive cash flow.
With good cash flow, you’ll meet all your accounts payable including paying your vendors/suppliers, utility bills, payroll, and other things. Suppose you did manage to make more money, then you can make some good investments and create an extra financial cushion for bad days.
Now, what happens when your cash management strategy is bad?
There will be a negative cash flow.
I’ll take a simple example.
Suppose your business credit terms are very flexible. For the reason, you have a large customer base and have managed to make some good sales. Your account books definitely show that your sales are good, but in reality, your customers are yet to pay you.
Your accounts receivable is still zero, while your account payable is growing. At this rate, either you have to take a loan or seek funds from external resources.
Tips for good cash flow management
- Invoice your customers soon after you give a service.
- Automate the process, so you can remind them and get paid early.
- Negotiate flexible terms with your vendors/supplier.
- Avoid giving huge credit terms to every customer.
Separate your Personal & Business Finances
What will be the consequence when you make personal purchases from your business finances?
What happens when you make this a practice?
Your business finances will dip and by the time you want to do some work on your financial statements, you’ll be in a complete mess. Creating reports for the tax will be a huge challenge.
Even though you have a sole proprietorship, you should keep your personal and business finances separate. In case, you come under IRS auditing, you’ll face lesser complications dealing with the situation.
Apart from all these complications, when you do finances in a combined fashion, you’ll struggle to meet your business expenses. Following which, you’ll take expensive loans and add more financial obligations to your growing list.
Tips for sticking to this plan
- Have two different checking accounts.
- Take help of experts. Have your expert team guide you in this matter.
- Use record keeping software exclusively for your business finances.
It’s common to experience profits and losses in businesses. But as a growing business, you should be more financially stable. Your focus should be more on the cash moving in and out of your business.
The more you have control over your business finances; greater will be your chances to grow better in the dynamic market.