Managing Money – 8 Tips for Managing Small Businesses Finances

You work too hard running your own business to be strapped for cash. But when cash flow is mismanaged, that’s exactly what happens. Here’s how to manage small business finances better.

According to research, 82% of new businesses fail due to cash flow issues. In other words, delivering work for clients, not getting paid or not getting invoices out promptly, leads to a problem with paying yourself and your bills.

As a business owner, you’ll need to get to grips with many facets of managing a business, its finances included.

Good money management is more than just paying your bills on time and sending out invoices. It’s about maintaining a consistent cash flow, understanding overheads as well as payroll and more.

There are a few things you need to avoid, negative cash flow is one of them. This is where bills and wages are paid but there is either no money coming in or the income that you do have coming in is not enough to cover these overheads.

Managing business finances is always important but with the economy ravaged by the recent health crisis, keeping a very tight grip on the financial position of your business is even more important.

As bookkeepers, we have created this very handy guide to money management tips that is a must-read for sole traders and entrepreneurs.

Tip 1 - Deadlines, dates and payments

Just like your personal account, you may have direct debits and standing orders set up to leave your business account on certain dates. Knowing when these are will mean you can ensure that there is enough in the account to meet these payments.

·        Draw up a list of up to date regular payments and the dates they are to leave your account

·        Transfer these dates to your Google Calendar and set a reminder for two days beforehand so you can check the account balance

Tip 2 - Monitor spending

How much money do you spend in a day? A week? And what are your overheads each month?

If you’re not monitoring spending, how do you know what you are spending your money on and whether you need it or not?

Aside from potentially, this lack of monitoring could also result in the misuse of funds. Some sole traders have one account which serves their purpose but for smaller businesses, separating accounts is not uncommon. From credit card account to a petty cash card, it is still important to keep a close eye on spending each week and month.

·        Link all your accounts to an online platform such as Xero, QuickBooks and Sage for accessible monitoring of expenses (and income)

Tip 3 – Don’t let non or slow payers slip through the net

Depending on how you operate, you may complete some or all the work for clients before they pay. You’ll need to make sure that they have signed a contract too so that they are clear about the terms of payment that they have signed up to.

But all too often, slow-paying customers or non-payers can slip through the net. It could be that you are so busy running every aspect of your business that the thought of sitting down at the end of a long day to chase non-payers with emails and phone calls is just too much.

·        Keep a list of customers who have credit from you and when their invoice is due – send a reminder if they haven’t paid by the due date

·        Credit control is something a bookkeeper can do on your behalf, including sending email reminders and making phone calls

Tip 4 – Separate business and personal funds

As a sole trader, it seems futile to run two separate bank accounts. It’s not essential although it can muddy the often-complex waters of managing business finances. Are all those expenses really business ones?

Separating business and personal accounts means that you don’t have to worry about potentially ‘embarrassing’ purchases showing up in front of your bookkeeper or them asking you a question of which category of expenditure to put it in.

Separating business and personal accounts makes it easier to manage money too, especially if you start to outsource work or welcome employees or contractors to your business.

·        Challenger banks offer simple, straightforward bank accounts for businesses that are worth exploring

Tip 5 – Get savvy with purchases

Just like personal bills, waiting to make purchases until after you have paid business bills and expenses are key to good financial management.

And when it comes to some purchase, timing is of the essence. For example, as you near the tax year end, buying supplies that are tax-deductible can help lower your tax liability.

·        Consider setting aside days in the month where you make key purchases knowing that bills have been paid

Tip 6 – Budget and forecasting

Another reason why some new businesses fail – and why older, established ones fail too – is overestimating sales and income.

Forecasting how your business will grow in the coming months is something that banks and investors will ask for. In some ways, it’s like asking how long a piece of string is but if you have a marketing plan and other ideas to grow your business, you may have growth goals.

Don’t overestimate income because even those these figures are estimated, you can rely on them happening. And when they don’t, it can land you in a world of pain.

Budgeting business finance is essential too, especially during leaner months. For example, if work tails off over the Christmas and New Year period, you’ll need to budget for the weeks after this time as income will be affected.

·        Create a budget and stick to it, reviewing it every 3 or 4 months

Tip 7 – Cutting costs

Being agile and lean is not the same as cutting corners but keeping costs under control – and increasing income at the same time - are perhaps one of the most difficult aspects of business finance management.

·        Analyse expenses – which are essential expenses, and which are ‘frills’? For essential expenses, shop around to get the best deals

·        Income generation – add value to the services and products you offer current customers as well as hosting a marketing campaign to bring in new customers

Tip 8 – Have a cash reserve

Unforeseen expenses and circumstances come knocking when you least want or expect them. Just like you have a small pot of savings for personal finances, decided a cash reserve for your business. This small pocket of money could provide the small bridge you need in a short-term crisis.

This article is not intended to constitute financial or legal advice for your business. For more information and up to date accounting advice, get in touch with an accountant. For help smoothing out cash flow and credit control, get in touch with the Prontus team.