How to Manage Money for Your Business
The major cause of business failures around the world is that entrepreneurs miscalculate the amount of money they need to spend. Most of such entrepreneurs might spend more than their actual profits and ultimately the business collapses. Most of the unsuccessful businesses fail because the entrepreneurs do not have proper knowledge about proper money management and their small mistakes cause serious problems for the business sooner or later.
The lifeblood of any business that keeps the operations run smoothly is its cash flow. To ensure that the business does not go bankrupt, you must keep a check on the business practices and use the following techniques of most effective money managers.
Forecast your future cash flows
Forecasting the future cash flows helps to make sure that you can manage your expenses and earnings in a proactive manner. To make a cash flow budget, you need to forecast your sales or revenues, expected inflows like receivables, expected outflows like cost of goods sold, payable loans, and operation expenses. It is also necessary to keep updating the cash flow budget according to the changes in the business environment.
Identify the sensitivities
Sensitivities are the items that have the greatest impact on the cash flows; it can include price, overheads, etc.
For example cost of goods sold has a direct impact on cash flow, and it is very hard for you to change its figure and you cannot increase the prices because of the pressure of competition. Account receivable days and inventory days are also sensitivities of the cash flows and impact the money managing decisions directly.
Make effective credit rules for customers
To manage your account receivables, you need to establish and abide by some credit rules. You can make policies to encourage the fast paying customers. For this, you can offer discounts to the customers who pay early. You can also consider taking measures to discourage late payments, for example, by charging interests on past due accounts.
Interest and late payment charges can turn into a source of extra income. However, it is necessary to deal the late payments with some due diligence. Very late payments can turn into write-offs and they tie up some of working capital of your business.
Keep updating your payables
You must be well aware of your credit obligations to manage your money smoothly. You can do so by keeping a regular check on your accounts payable. Keeping an ‘aging schedule’ is a good practice. It demonstrates your amount of debts and the names of your creditors as well as your existing or overdue invoices.
Minimize your expenses
Try to find ways to curtail expenses. For example, taking measures to reduce the cost of advertising materials (like production or printing), so that their impact and quality is not compromised. If the business gets a seasonal increase in volume, consider hiring temporary staff (contractual or part time) rather than adding the strength of the permanent staff. If you conduct an independent audit, it may tell you what is redundant at your disposal and which practices are inefficient. You can then take cost cutting measures to address such issues.
Make effective use of credit
There are various credit facilities for different types of businesses. You need to choose a credit facility according to your business’s circumstances. For example, if you require making up the needs of working capital in the short run, you can use lines of credit. If you intend to make capital purchases for long-term, you can avail term loans.
Don’t let your surplus rest
Estimate the money you need to reserve for emergency. You can do so by looking at your past cash flows to trace some pattern spending. Additionally, check the impact of economic changes, fluctuations in interest rates or currency, upon your earnings or expenses. If you have surplus cash, use it for expanding your business, paying off your debts, or even better invest at better rates. Don’t leave your surplus to stay idle.