There is a simple dilemma that many small- and medium-sized business owners face on a daily basis. They are really good at producing and selling whatever it is their business sells, but they don’t have the knowledge to be good money managers.
Unlike larger corporations, these smaller businesses are often faced with the challenge of money management on their own, or at least without the help of a huge team of financial professionals. Sometimes as a result, money management can be pushed to the side as an ancillary thing instead of a focal point of the business.
No matter what their financial background, all business owners know there’s more to running a successful business than just creating and selling. In order to stay in business, you must be able to collect to create cash flow and manage all your accounts in the proper fashion.
In essence, money management is simply the process by how you handle your business finances. This includes setting goals, tracking your expenses and income and budgeting. A good money management plan will help you make sure your business will churn out a profit, and also avoid a time period of negative cash flow.
Certain aspects of money management will also keep your business on sound financial ground, paying all your bills on time and well prepared for expected months of lower income, such as expected seasonal downturns.
Let’s take a look at some best practices when it comes to business money management and six tips to help you on your way.
Create a Budget
Step one to any money management plan – whether it be for personal or for business – is to create a budget. On this budget should be a list of all your expected income and all your expected profit.
A business budget should be projected out as best as possible for an entire calendar year, and then broken down by quarter, month and even week (depending on your industry). Essential services need to be plugged into this budget, as well as a forecast of your expected income.
Creating this budget will allow you to see times of the year when you might have extra money on hand to invest in new equipment, for example, or times of the year when money might be tight and purchasing might not be a good idea. Having a budget created for the entire year will also allow you to make larger adjustments to your operations if need be so that you don’t get yourself into financial trouble.
Know When Your Bills are Due
After you have created your budget, it’s time to know when all your bills are due. Create a chart, spreadsheet or any other form of tracking to know the due dates and amounts of all your recurring payments.
For your business, this could include business loans, credit cards and charges for services such as internet and phone. It’s very important that you pay your business expenses on time, as not doing so could result in late charges, extra fees and potentially even having essential services shut off.
Keep an Eye on Your Spending
As a small- or medium-sized business owner, it’s easy to swipe a credit card or pull from a line of credit when you need to make a purchase to support your business. And while this isn’t necessarily a bad thing, it’s very easy to get overwhelmed and break your budget if you’re not tracking all of your spending.
Every time you incur an expense, you need to record it as a new line item. Even if the purchase is for $10, it’s still important that you get into the habit of tracking it. By staying on top of all your expenses, you’ll have a better grasp of your business finances and avoid overspending.
Manage and Track Your Employee Costs
Speaking of costs, one of your biggest expenses as a business owner are your employees. important to not keep the cost of your workforce as low as you can – without sacrificing quality, of course. In addition, it’s essential that you have a good handle on your employee expenses.
The best way to do this is through a time and attendance tracking system. The right piece of software in this regard will keep your employee tracking accurate, allowing you to pay out only what you should, and it will reduce mistakes that can be made at the same time.
Stay on Top of Receivables
Making a sale is great, but if you never collect the money associated with the sale, was it even worth it? Many companies judge their success only by their sales. While sales can be a good indicator of how well your company is doing, you only reach a profit if you actually collect the money from the sale.
That’s why it’s so essential to track and stay on top of your accounts receivable. Every industry is different in terms of their collection cycles, but you should aim to keep the number of days you collect money from your customers as close to when you issued the invoice as possible.
There are plenty of accounts receivable tracking tools available to help you in this regard. No matter how you decide to track it, though, you should ensure that none of your customers fall too behind on their accounts, and you should pursue the money you’re owed vigilantly.
Have Extra Cash on Hand
There are no doubt going to be times of the year when your business isn’t performing as well as it did at another point in the year. There are also times when you’ll fall short of sales and collection expectations. When this happens, you might find yourself in a little bit of a pickle if you haven’t planned properly.
It’s always a good idea to have a reserve of cash on hand that can be used when the money isn’t flowing in as much as you need it to. Think of this as your business’ “rainy day fund.” This extra cash reserve can help you cover payroll and other expenses if you’re behind on collections, or cover the cost of an emergency expense, for example, a broken piece of equipment that you need to replace.
You should always plan for the unexpected and be able to weather the storm, as they say.
By following these six basic tips to money management for small- and medium-sized businesses, you’ll be better prepared to have a long, successful run in business.