Businesses can rise and fall based on how they manage their money. Even the most prominent business with the most reserves can crumble overnight. When it comes to the mismanagement of funds, the impact is far-reaching.

There are many new businesses every day, which is excellent. The issue is that within three years, 1/3 of those will close. And often, this is down to the mismanagement of business finance. Great products and even a steady stream of customers can’t save a business who is leaking cash. Once the cash is flowing in the wrong direction, or there is little to no profit – it is game over.

Big financial decisions get made every day. In fact, many business decisions get made before the official opening or launch. Unfortunately, many small business owners have big ideas, but limited knowledge about finance.

The resources you have in place as a business owner can make a huge difference to your business health. Choosing to hire professionals to manage your money is often the best investment you can make. CFO Strategies LLC state that “Managing cash is the most important, yet most stressful, function for business owners and management of many emerging and growing businesses“. And they are right.

But for those with limited to no business finance understanding, here are some basics.

Managing and Tracking

Your business cash flow is defined as the money that comes into and out of your business, over a set period.

You have income from customers. Paying for your services of products. Outgoings will be loan repayments, supplier payments, rents, materials and ‘the cost of doing business’.

Negative Cash Flow

Negative cash flow is when your business runs into its overdraft or needs loans to cover a shortfall. This happens when clients and customers are late in paying, or you have invested in a large item for your business.

If negative cash flow is planned in, then you won’t worry.

Positive Cashflow

Positive cash flow is when you have a higher income than outgoing. So you can pay all your bills on time, and meet unexpected costs.

For a new business, it is important that you track your cash flow daily or weekly. Once there is a stable pattern, you can switch to less often.

Why Does Cash Flow Matter?

Cash flow makes an impact in all areas of your business. It is a critical component of your success. As stated in the opening, a lack of cash is often the reason that so many small businesses fold within the first three years.

In the early days of your business, it is tempting to take a few financial risks. Buying a little too much inventory, hoping to sell out. Or buying things you don’t need because you want to ‘make sure you have everything’. The truth is that many businesses can launch on a shoestring – it just doesn’t feel like it.

Money Management for Small Business Owners

What steps can you take to reduce the risk your business will run out of money?

Forecast

You should create a cash flow forecast and statement. These are very simple but will give you a rough indicator of what your finances should look like. There are several tools you can use to put together a monthly forecast.

• PlanGuru provides current cash flow and forecasting.
• Float can integrate with a lot of other accounting platforms, and it can auto-populate
• Pulse can give you a snapshot of your accounts and can help with cash flow projection
• Or you can use a simple excel sheet

Payment Terms

A key part of managing your finances will be paying close attention to the payment terms that you set. And the payment terms that you agree to. In most cases, you will sell directly to a customer and take payment immediately. However, in the case of B2B, there are often payment terms of 7,14,30,60 or 90 days.

There is also the issue of giving credit to customers. This can build a quick customer base, but if there are a number of customers that take your offer of credit, and a percentage of those don’t pay – you will be working in minus figures. So you have to ask yourself – how can you operate if you are waiting for the payments to be made?

And, in every business, there is the issue of late payments. The client can’t afford it, or they too have cash flow issues. Will you charge interest? What about an early repayment scheme? Your own payment terms matter, so pay careful attention to them.

Suppliers & Customers

In the early days of business, you will be tempted to take as many clients as you can handle. And, a supplier that can give you what you need quickly. The problem is, those clients and suppliers are less vetted than they should be.

If you can take the time to do background checks, credit checks and read plenty of reviews before taking on a client or agreeing with a supplier, then do so.

Imagine you take on a client in haste – just to get started. The client is demanding, and you are still getting used to balancing time, effort and price. They take up all of your time. You hand over the work or products, and they simply no longer respond to your calls, emails or invoices.

Now what?

You have the option of going to court, but that is expensive and lengthy.

While you are unlikely to be able to avoid these things completely, credit checks using Experian or Creditsafe can give you an overview of the general health of a company. Which means you can decide to charge smaller amounts over time, upfront or not work with them at all.

Manage Expectations

One of the worst things is when two people expect different things from each other. You expect your client to provide you with some copy or some materials. The client expected you to provide some copy or some materials.

Both of you will be left with an issue in this case. You should take the time to draft your terms of business, that includes what you expect and need from the client – and when.

Cover payment terms, materials, delivery dates, charges, late fees and more. This can be time-consuming but can provide you with substantial protection.

First Name Basis

The people who happen to be on the firing line when it comes to late payments are usually the people who are paying the bills – but they don’t always own the company. So be respectful, be nice, and ask Jackie in accounting if there is anything that might mean it isn’t paid on time, and that you have sent it to the right place.

Be nice to Jackie, and you might just find that if there is an issue, they will take the time to call you and let you know.

Debt

Debt can be a useful tool for your business, but it needs to be managed well. Almost all businesses have debt that they use in order to keep their business running, and can rely on if needed. There can be a small step between manageable positive debt, and debt that spins out of control and requires money you don’t have to fix it.

Reducing Costs

Cutting the costs involved in running your business may seem like the most obvious way to manage your money and ensure that your company does not get into unmanageable debt. But, striking a balance between cutting costs without negatively impacting the quality of your products and services can be a challenge. Implementing software systems that enable you to increase productivity and save on costs while also improving the quality of your service is the ideal solution to this issue.

Using technology to your advantage and finding ways to automate your processes can help you to save both time and money. Robotic process automation (RPA) is an ideal way to speed up time-consuming tasks and reduce costs. RPA tools will allow routine tasks to be handled automatically without adding to your staffing costs, and your employees will have more time free to focus their attention on business-critical tasks.

Negotiation

Almost everything is up for negotiation if you are willing to try it. Suppliers can often do great deals on specific amounts of purchase. Getting a range of quotes can mean that you can use that to negotiate with a different company. Discussing more flexible payment options for yourself, or teaming up with other small companies to get a better deal. There is often a deal worth discussing.

Rainy Day Fund

There are many things that you can’t plan for. Pandemics, natural disasters, and illnesses. So it is important that you have some savings you can use when you need to. If you are making a profit, even a small one, try to put some of that profit into savings. It will help you to reduce the need for credit and overdrafts attached to your business.

Savings will also allow you to take up opportunities when they arise without worrying about the day-to-day cashflow being impacted.

Money Management as the Focus

Managing your cash as a small business shouldn’t be secondary to anything. There is no room to leave it to a simple afterthought. You ideally want your business to last more than three years, and for life if possible. Many small businesses fail within the first 3-5 years – due to the mismanagement of money.

Small business owners can often feel intimidated about managing their money, though. They know it is a crucial element for success, but this can often put even more stress on them. You can overcome this by working with a service with the know-how to guide you in the right direction. Ideally, this service will use reliable financial advisor CRM to prevent any mistakes. This will also ensure they have all the data they need to give you a nudge in the right direction, help you forecast your future, and keep your money where it needs to be.

The numbers you see on the forecast is the fuel for your business, and without keeping an eye on them, and learning how to look after them, business growth is almost impossible.

Money management isn’t something you can learn to do overnight, which is why many small businesses outsource to accountants, bookkeepers, and money management companies.

Yet, you should still learn the basics yourself. So you can take an active role in the money that your business makes, and spends. Learning how you can leverage what you have in the bank and when. How to cut costs – and when to do it. Money management for small business owners is a must, not a maybe.