Financial management is crucially important to the future growth or failure of small businesses. In fact, 8 in 10 new businesses fail due to bad financial planning.
You will know you are successfully managing your money if you are creating wealth for the business, generating cash and providing an adequate return on investment.
A Beginners Guide to Managing Your Finances
This BizConnect guide will provide you with money management tips that will assist you to optimally plan and manage your business finances. Below are some key financial management terms and processes that you need to know about:
Top of page
There are three key elements to the process of managing your money:
1. Financial Planning
You need to ensure that enough funding is available at the right time to meet the needs of the business. In the short term, funding may be needed to invest in equipment and stock, pay employees and fund sales made on credit.
2. Financial Control
Financial control is a critically important activity to help ensure that the business is meeting its objectives. Financial control enables you to ensure that assets are being used efficiently, that business assets are secure and that management is acting in the best interests of shareholders and in accordance with business rules.
3. Financial Decision-making
The key aspects of financial decision-making relate to investment, financing and dividends: There are always financing options to be considered, such as raising finance from selling shares, borrowing from banks or taking credit from suppliers. A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders so that this money can be reinvested into the business to continue to grow revenue and profits.
Often start-up entrepreneurs make the mistake of trading from their personal bank account. This makes it harder to differentiate between your personal expenses and business expenses. It also doesn’t allow you to build up a credit risk profile for your business, which is an important factor should you ever want to approach a bank for financing. Rather, start trading as a business from the get-go by opening up a Business Current Account.
Top of page
When it comes to managing your finances, a budget provides an estimate of income and expenditure over a set period of time and is the foundation of every financial plan. A good budget can help keep your spending on track and even uncover some hidden cash flow problems that might free up more money to put into other areas of the business. The main reason to create a budget is to help you keep your finances under control by keeping track of how much money you're spending and where it is going.
Click here to download a free basic budget template for your business.
Top of page
Financial forecasting is the process of thinking about and preparing for the future. It enables you to express business goals and priorities and to ensure that they are internally consistent. It also helps to identify asset requirements and needs for external financing.
Since most Balance Sheet and Income Statement accounts are related to sales, the forecasting process can help you to assess the increase in Current and Fixed Assets which will be needed to support the forecasted sales level. Similarly, you can also determine the external financing which will be needed to pay for the forecasted increase in assets.
Top of page
Accounting is the systematic recording, reporting, and analysis of financial transactions of a business and is an integral part of managing your finances. The accountant is required to follow a set of rules and regulations, such as the Generally Accepted Accounting Principles (GAAP). Accounting allows a company to analyse the financial performance of the business, and look at statistics such as net profit.
There is a wealth of accounting software out there that focuses on usability and automates a lot of the work involved. Using online software to streamline bookkeeping frees up the accountant to provide more constructive, proactive advice to small businesses such as tax minimization strategies, budgeting and cash flow forecasting.
Every business needs an accountant, so it's best to engage one right away. Make sure you get an accounting system with simple dashboards so you can see your business in real-time.
There are a few common accounting mistakes that can really mess with your business finances. Here’s how to avoid them.
Top of page
Credit management helps to ensure that your business remains financially stable. It involves qualifying the extension of credit to a customer, monitors the receipt of payments on outstanding invoices, the initiation of collection procedures, and the resolution of queries on customer invoices.
The process of credit management begins with accurately assessing the credit-worthiness of the customer base. This is important if you choose to extend credit line to customers. Proper credit management requires you to set specific criteria that a customer must meet; before you agree to extend credit to them, and to determine the total credit line that will be extended to the customer.
Use established commercial credit bureaus like Experian or TransUnion, which have records of all South African businesses' credit histories, including poor payment reports, judgments and other relevant information to assist you in assessing your prospective customer. You can also use bank references and checks, other trade references and industry groups.
2. Credit Monitoring
Once you have vetted a client and entered into a credit agreement with them, you need to monitor the way they use their credit facilities. It's advisable to obtain a company order or purchase form from the client. Get everything in writing on a letterhead. This written confirmation can be used in conjunction with your own purchase order form.
Here are a few simple steps to follow to improve monitoring and collections:
- Send the invoice with proof of service delivery, such as a signed delivery notice
- Hand deliver invoices where you can and have the client sign delivery
- If you have to post the invoice, follow up with a phone call to ensure that it was received
- Send statements at the end of the month and ensure they reflect the amount outstanding in payment terms. Your accountant can apply overdue or "please pay" stamps
- Follow up with telephone calls. Ask them to confirm when payment will be made
- Keep all proof of communication - fax transmission slips, copies of documents posted, and records of phone calls (including date, time, who you spoke to and what their response was)
- Keep your promises. If you say you will call again on Monday, do so. It shows your clients that you are on top of things and that they will not slip through the cracks
3. Collecting outstanding debt
What do you do when an account is overdue? Here are some of the most effective ways to collect outstanding debt:
- When a client has not paid, it is advisable to start with a simple letter of demand and place them on terms to pay by a specified date, failing which you will hand the debtor over for debt collection.
- In most cases, when a commercial creditor hands over their customers for debt collection, the business relationship has broken down, and it is likely that you will lose that customer.
But you should not delay this process too long. Creditors who act first are usually the ones with successful results; those who are slow are often the losers. On a regular 30-day account, any account which is in excess of 120 days is a serious candidate to be handed over to a third party for collection.
Top of page
Cash flow shows the amount of cash generated and used by a company in a given period and is a very important part of managing your money. It is calculated by adding noncash charges (such as depreciation) to net income after taxes. Cash flow can be attributed to a specific project, or to a business as a whole. Cash flow can be used as an indication of a company's financial strength.
In any business, cash flow is essential to solvency. Having enough cash on hand will ensure that creditors, employees and others can be paid on time. If a business does not have enough cash to support its operations, it is said to be insolvent, and a likely candidate for bankruptcy should the insolvency continue. Companies with ample cash on hand are able to invest the cash back into the business in order to generate more cash and profit.
Here are a few common cash flow problems that you will want to avoid.
Top of page
An audit is like an annual check-up for your business. It can provide deep commercial insight into your activities. An audit is nothing more than a formal examination of your accounts and financial records. It's done to verify that funds were used as they were intended and in accordance with standard financial management practices. This is where you really want to ensure that you have correctly managed your finances.
Audits are important because they provide extra assurance to users that the financial statements are free from any mis-statements, omissions or errors. They give shareholders and potential investors the assurance that companies comply with legislation and practice sound financial management.
As part of an audit review, the auditor provides the client with useful information and recommendations that will help management with future decisions. That's why the audit is not merely a review of historical information, but also a useful tool for future business planning.
The Companies Act stipulates that only listed companies, and companies deemed to be in the public interest, are required to be audited. Others may choose between an independent review and an audit. However, if you plan to approach the bank to lend you money, it is essential to have a set of financials.
The relationship between client and auditor is important. Trust is critical, but so is the auditor's ability to add value to the business. A thorough audit can enable the business to become more profitable each year.
Before you panic about being audited, read through this guide on what to expect.
Top 10 financial management tips for start-ups
Top of page
- If you are not a financial expert, hire an expert or do training to become proficient
- Keep up-to-date with taxes
- Keep an eye on cash flow - monitor accounts daily
- Credit management is critical
- Keep all costs as low as possible and manage your overheads (apply bootstrap thinking)
- Keep a nest egg aside for a rainy day
- Keep your creditors up to date and communicate openly with them
- Offer customers incentives to pay their debts quickly so that your cash flow can be predicted with greater accuracy
- Stick to your budget
- Your accountant is your closest ally when it comes to financial management. Provided they are doing their job properly, they will be the first ones to alert you about any potential problems
Managing your business finances is a detailed process all on its own, which is why you want to manage your personal finances separately. Here are a few tips for successfully keeping your business and personal finances separate.