- Track your goals, set milestones and make it a habit to forecast how much money you make, spend, and put back into the business
- Managing cash flow helps you better control your business funds and means you’ll never run out of money
- Make sure you monitor and compare income and expenses regularly with your budget to identify any deviations from your target
- Create separate personal and business contingency funds in emergency saving accounts to cope with any unforeseen circumstances
82% of businesses fail because of cashflow problems that result from bad financial management like poor budgeting, lack of funding or awful product pricing. Financial management is crucial for business success. It means more than just booking keeping, or balancing the business accounts, which is what most entrepreneurs focus on when starting up.
Startups can’t neglect financial management if they hope to grow or survive bad times. If you are looking to startup or are struggling to manage your finances, here are some financial management tips to help you and your business succeed.
Understand Your Finance Numbers
It’s surprising how many entrepreneurs don’t understand their basic numbers and how they work. You’ll see this happening first hand on shows like Shark Tank and Dragons’ Den, where business owners pitch their ideas to investors.
Understanding numbers like profit and loss, gross or net margin will mean that you’ll know how your business makes and spends money. This is crucial for pitching to investors, pricing your products, budgeting, and forecasting to achieve your business goals.
You don’t need an accounting degree. Start with the basic revenue and expenses concepts like profit margins, loss, debits and credits, and invoicing. Learn how to do these well and also learn about how banking affects your industry.
Make Clear Long Term Financial Goals and Plans
What is your overall financial goal? Is it to make a million-dollar company or make a hundred thousand dollars this year. Whatever your goal, you need to break this down into ones you can reach month-by-month, week-by-week, or even daily. Make these Specific, Measurable, Achievable, Realistic and Timely (SMART).
To track your goals, set milestones and make it a habit to forecast how much money you make, spend, and put back into the business each week and month to hit a milestone. This will paint a clear picture of how the business is heading towards your financial goal and if you need to adjust your spending or make more money to get to there.
Manage Your Cashflow
Have you ever heard the saying, “Cash flow is king!”. That’s because cash flow is the lifeblood of all businesses. Many startups and long-running businesses fail because they don’t have the everyday cash to spend on what they need, especially when times get tough.
Managing cash flow helps you better control your business funds and means you’ll never run out of money. Create appropriate channels for receiving cash flow, budget to avoid overspending, and use cash wisely.
Establish a Financial Budget
Often, expenses quickly rise up when launching a startup because entrepreneurs tend to focus on getting fancy things like office space or equipment. Market prices are constantly changing, and startups are new to the market. They haven’t built good relationships to negotiate lower costs for things like rent, manufacturing or transporting goods. Having and sticking to a budget can mean you don’t let expenses slip to a point where it becomes a problem.
Set a startup budget and one for every year and month after. It should contain short and long-term financial strategies to deal with any issues you have along the way. For example, you could have strategies for:
- Choosing a decent looking office space in a cheaper location in the suburbs instead of an expense top of the range city centre office because office location brings rent, utilities, and transport costs
- Hiring the right amount of multi-skilled workers who can do a range of different tasks well, instead of an expensive specialist who only does one job because staffing brings salaries, taxes, and other overheads
- Lowering utilities by choosing a good cheap provider instead of the best utility provider
- Maintaining the right level of stock so that you don’t stock more than what you need and don’t run out of stock
Make sure you monitor and compare income and expenses regularly with your budget to identify any deviations from your target. A financial budget will help you stay within your budget limits.
Use Smart Credit Management
Smart credit management is all about negotiating good credit terms so you can receive money on time from debtors that owe you, pay money on time to any creditors you owe and maintain a good credit score.
Too often, entrepreneurs focus on getting a good sale without establishing good payment terms because they need the money, equipment or goods right now. It’s vital to set terms that allow your business to afford repayments. If not, you’ll default repayments and carry debts over to the following month and financial year. This puts pressure on your business to make even more money and worsens your credit score, which banks, partners and suppliers judge before loaning you money or stock.
Set Up a Contingency Fund to Plan For The Worst
You should always remain optimistic when starting up a business, but you never know what might happen. In the best-case scenario, you achieve everything you want. In the worst-case scenario, you lose the business, any collateral used to fund it e.g. your house, and your retirement pot because it’s tied to the business being successful.
Create separate personal and business contingency funds in emergency saving accounts to cope with any unforeseen circumstances. Having separate funds makes it easier to audit and not mix personal and business expenses. You can start by saving a small amount. If bad times come for the business, use the business fund. Only dip into the personal funds if it’s necessary.
Keep Systematic Financial Records
There will be a lot of finances and paperwork, especially receipts and invoices when starting up a business. It doesn’t matter whether you maintain accounts manually or on a piece of accounting software; what’s important is how systematic you are. As the business evolves and grows, maintaining manual records could become more complex. Use an accounting system to automate this process or eventually hire an accountant.
Keeping a good record allows you to track how money comes in and goes out of the business and whether this is achieving your financial goals. It also creates an audit trail for when you want to carry out taxes, reclaim business expenses, and provide information to financial auditors, bankers, and others to check your finances.
Whatever your business, the above tips will help you maintain great financial management and help your startup succeed. Take the first step today by using our free financial management resources to begin.