Money Management Tips for Small Business Owners

Money Management Tips for Small Business Owners

Money management is a technique which businesses employ to keep track of the cash that comes in or goes out of the business. With efficient money management tips, small businesses can cut down on unnecessary expenses and hence, more revenue is accrued by the enterprise.

  1. Creating a cash flow budget

All the incomes, expenditures, and expected expenditures regarding cash is noted down in a particular format. This is called the cash flow budget. Creating a cash flow budget will tell the business exactly from where the cash came in from, and how much, and how much has already been spent. It also maps out the possible expenses that might be incurred in each department. Thus, the business has a cash budget to adhere to, and a system which helps to keep in check unnecessary expenses. This helps in managing the cash of the business and ensure the proper allocation of the cash expenses.

  1. Knowing the sensitivities of the cash flow

There are always sensitive spots in a business’ cash flow. Knowing these sensitivities help to manage the money that comes into the business. Usually, the cost of goods sold has the impact on the cash flow. The business often finds itself unable to control the costs of goods sold. Hence, the outward cash flow increases. But, locating the other sensitivities, like sales, volume or overheads, can significantly reduce the outward flow of cash from the business. This way, extra expenditure can be managed properly without compromising the business.

  1. Managing the credit being extended to the customers

Extending credit to customers is a common occurrence in a business enterprise. But, managing the credits is not everyone’s cup of tea. Proper policies regarding the receivables from the customers should be in place. These policies should not be too rigid so as to lose the customer base, but it should also not affect the cash flow of the business. Effective credit policies are a must in money management in a business enterprise. Instruments like discounts for early creditors is an effective way of ensuring that the business gets its money back on time. While interests are an important way of earning extra cash from the creditors, extremely late receivables have an adverse effect on the working capital of the business.

  1. Keeping the payables up-to-date

Bills payable are a huge slough off on the cash flow of the business. But, it cannot be avoided. The best practice is to keep a timely check on the payables and not let them get delayed any further, since the accrued interest will also have an adverse impact on the cash flow. An aging schedule is the most effective way of keeping a track on how much is owed, to whom and by when it should be paid off.

  1. Using credit effectively

The credit being availed by the business is very important. Each and every business needs credit. But, most often than not, the wrong type of credit is availed by the business. A thorough knowledge of the different types of credits available and the places it will be used for should be known. An intensive plan of the areas where the credit has to utilized should be drawn up. Doing this will keep a check on the cash inflow that is due to the credit being availed by the business.

  1. Putting surplus cash flow to work

The surplus cash should not be left idle. The cash that is left after the emergency provision should be put to work immediately. If no department can use the extra cash, then it should be promptly invested in the market. Idle cash is the worst enemy of cash outflow issues. The surplus cash can also be used for business expansions or paying off debts, buying new machinery, or increasing sales through advertisements.

Money management is what every small business struggles with. With these tips to guide the way, small businesses can effectively manage the cash flow in the business.

4 Responses to Money Management Tips for Small Business Owners

  1. One part of cash flow management where both skill and luck is needed is inventory management.

    Of course it’s not good to have many items sitting on shelves for months when you can just order them as you go, and this is what makes just-in-time production popular.

    On the other hand, some customers are willing to pay higher prices to save a few days so it can pay to have the material on hands already.

    As to the cost of goods, some suppliers will cover the shipping cost on larger orders, or give additional discounts. So you would basically need to have enough materials on hand to complete all your customers’ orders before ordering new materials. So you can both deliver quickly, and get best prices on replacement stock.

    It’s easier after some time when you know how often your business uses each component. Basically you want to keep enough on hand so you can wait a week before placing any order, and order new material to replace your stock as the same rythm it’s expected to come out.

    To make it easier, it’s good to have some wildcard items that can be used in anything you sell, with the rest being bought just before running out of inventory.

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