7 Tips to Manage Money In Your Small Business

Managing money in a small business can be challenging for every entrepreneur. It doesn’t matter if your business is in the early stages of existence or if it is mature. As a business owner you have to keep control over how much money you receive from customers and how much you spend. Without proper cash management tools, any business will eventually fail.

If you are struggling with staying on top of your business finances, here are some useful tips and solutions you can implement immediately.

1. Pay your bills on time 

It can be tempting to postpone your supplier payments if cash resources are tight. But trust me, in the long term it can only lead to more problems. There is a risk that your suppliers will stop trusting you and suddenly your business may be cut off from important sources of supplies. Also, you may incur late payment penalties which can be substantial when accumulated.

Review your Accounts Payable reports on a regular basis to make sure no payment deadlines are missed. The report will show you all unpaid supplier invoices together with their due dates. Most probably the payment process in your small business is not automated. In this case the Accounts Payable report will be a very useful tool for you to monitor outstanding bills.

2.  Reduce expenses

Analyse your business expenses regularly to pick up any significant increases and fluctuations. Certainly, you will notice areas for possible cost cuts. For instance: travel expenses can get out of control very quickly if you don’t keep an eye on them. Staying in expensive hotels, travelling long distances, not buying flight tickets early in advance, eating in overpriced restaurants, these can contribute significantly to your overall costs but can be easily avoided by choosing inexpensive alternatives.

If you employ people, you might also evaluate if it is necessary to employ full-time staff or perhaps hiring part-time employees or contractors may be sufficient. Salary costs are always the biggest chunk of total expenses and you will always need to seriously consider your business needs before you commit to hire employees.

Travel expenses can get out of control very quickly if you don’t keep an eye on them.

3.  Keep an eye on customer receipts

It’s extremely important to collect money from your customers with no delays. The best solution is to ask for payments upfront and it eliminates any problems with late payments. This is a common practice for sales of online products and certain professional services.

However, if you offer credit sales, you have to track the outstanding amounts by reviewing Accounts Receivable reports regularly. Send reminders to your customers as soon as invoices become overdue and follow up with a phone call if you don’t get replies. You can also consider offering early payment discounts or charge late payments interest for overdue invoices.

4.  Create a cash budget/forecast

This is often neglected by business owners. Some of them think that preparing a cash budget or forecast is a big investment of time and usually requires a lot of knowledge. There is also an assumption that budgets are for big companies only. But trust me, this is not the case! And I would say that if you knowingly refuse to prepare a budget, you are putting your business at huge risk. It is not possible to run a business without knowing how much money it is going to generate and how much it can spend.

Investing your time in creating a cash forecast/budget will significantly improve cash management in your business. And it doesn’t have to be a daunting experience to prepare one.

5.  Separate business and personal money

Many small businesses operating as sole traders do not separate their personal and business finances. They use one bank account for both because they assume it is more convenient. Well, it may seem convenient because you don’t have to think which credit card to use when you purchase something. But on the other hand, when you have both personal and business money in one bag, there is no way of knowing how much cash is available for your business.

No matter if you operate as a sole trader or a limited company, the best practice should be to have separate bank accounts and credit cards for your personal and business finances. It makes cash management so much easier for you as a business owner. And it is way easier for your accountant to reconcile your bank transactions when preparing accounts. It gives a clear picture of the cash situation in your business at any moment in time.

If you knowingly refuse to prepare a budget, you are putting your business at huge risk.

6.  Keep a cash reserve

You can never predict unexpected situations and sometimes you may need emergency money in your business. Thus, you should set aside a certain amount of money on a regular basis just to have this reserve for urgent, unforeseen expenses. It doesn’t have to be a huge amount and it will depend on the scale of your business and the cash flow pattern.

The best solution is to establish a certain percentage of money coming in or a fixed amount to be paid into a savings account regularly. You will need to use your cash flow forecast to decide how much money you can move to the reserve account. It’s important to make sure that this does not affect any of the future payments.

7.  Learn some basics of business accounting

I know business owners who don’t want to have anything to do with accounts and bookkeeping. They are convinced that they can run their business successfully without even basic finance knowledge and leave all this stuff to their accountant. Well, I think this is a huge underestimation. Believe me, you would be very, very lucky if you managed to do that.

Even CEO’s of big multinational companies must have at least fundamental understanding of how accounting and finance works. Otherwise they wouldn’t be able to make right decisions. It’s absolutely worth to invest some of your time and money into educating yourself in the basics of bookkeeping and accounting. This will prepare you to make informed and smart decisions about money in your business.

Talk to your accountant today!

If you haven’t implemented any cash management tools in your business yet, it’s never too late! You will be amazed to see how it can help your business grow and perform better.