Finance acts as the accelerator for any business if it is well-managed. Nevertheless, mismanaged finances can make any business drown without much hope for reincarnation.
Cash flow problems can occur for various reasons – sometimes companies fail to plan their finances properly, sometimes they set their sight too low or too high, and sometimes they don’t keep a tab of the expenses and costs.
However, when it comes to your business, you must be aware of the financial pitfalls to maximize your chances of success.
Financial Planning – Ideal Ways to Do It
As an emerging entrepreneur with less knowledge about accountancy and bookkeeping, it may seem difficult for you to manage your business finances properly. To help you on that part, here are a few tricks and tips for implementing in finance management.
The first thing you must concentrate on is forecasting the possible expenses while setting up your business. By doing it, you can understand the urgent need for funds and a precise line of expenses. Check the below example for an idea –
- 50% of a company’s revenue will go on payroll or supplies
- 30% of the revenue will go on an equipment purchase, inventory expense, and recruiting
- 20% of the revenue can go on future developments like opening a new line of production and services
This projection will certainly vary for your company based on the industry type, domain, business verticals, products, and a few other factors.
Without successfully conducting this stage, you can’t move on to the next stages of financial planning.
Make realistic financial decisions
The power of taking rational financial decisions is one of the greatest entrepreneurial characteristics that every business owner must possess. The more realistic decision you can make, the more your business will thrive in the long run.
In multiple instances, entrepreneurs are found to burn in the happiness of ownership. It makes them authoritative, leading to misjudgements and mismanagement. Even though you are the sole proprietor, it’s better to seek an expert’s advice when it comes to financial decisions.
Consider hiring an accountant or consulting an accountancy firm that takes the pragmatic approach to avoid mistakes.
Keep a tab of your cash flow
A lot depends on proper cash flow management. While running your business, you must keep a tab of the inflows (i.e. the sales of services or goods) and outflows (accounts payable). Later, when you look at this chart, it will give you an insight into the account payables, account receivables, and the amount of money going in and out of your business.
Apparently, your inflow must be more than your outflow. So, if you see the inverse in your cash flow chart, do something about it as quickly as possible. It means your business is at risk at this point in time — make a change in expense pattern, improve your earnings, ameliorate quality, evade improper financial decisions, and cut down unnecessary outlays. In no time, you can see a significant rise in the inflow graph.
Manage debts by clear-out dues
Too many defaults can result in bad credit and CCJ. These debts may have occurred because of the previous loans you took for business capital, mortgage payments, equipment purchase, inventory management, expansion, or any other managerial purpose. Well, no harm in that, but it’s better to get rid of the burden when your revenue is on a high.
But in case you can’t pay off all the debts at once, you can take out long term loans for bad credit with no guarantor. Such a loan can be a debt consolidation loan, where you can use the amount of repaying all existing loans. As a result, you’ll be left with one single monthly instalment that you can pay gradually over the tenure.
Make minor alterations in cash flow
Any business needs to have an emergency fund that can help sustain for three to six months during a rough course.
But if your cash flow is inappropriate at this moment, then you may not be able to save in the emergency account. Well, no need to panic about that! With minor adjustments, you can make a significant improvement in your cash flow.
You may consider the following alterations –
- Negotiate with your suppliers about the payment dates to regulate inflows and outflows in a better way
- Reduce the terms of invoice payments by a day or two to motivate your customers for faster payments
- Realize the negative impact than can occur due to inventory sitting in the warehouse or back office as it consumes both revenue and space
- Maintain a good credit score so that you can avail short-term loans whenever necessary
Regularly review business expenses
Any business needs to keep a constant eye on business expenditure. For review, you must seek the advice of your financial advisor. Accountancy and bookkeeping come into the game at this point in time. By regulating your daily business expenditure, you can also avail of significant tax exemptions.
Accounting software is useful tools for this purpose. Those tools can help you drive essential reports like –
- Profit and loss reports – These reports highlight your company’s income, expenditure, and profits
- Balance sheet reports – The purpose of these reports is to pinpoint assets, liabilities, and net equities
- Cash flow statements – You can learn about the cash inflow and outflow of your business
- account payable and account receivable reports – These reports help you identify the amount of money owed by and to your business
- Depreciation reports – Finally, you get to know the breakdown of the value of your business assets
While deriving these reports, don’t mix up your personal and business finances. They are supposed to be kept separated, i.e. there should be a separate bank account and credit card for your business. It makes it easier to track down business income, expense, profits, and taxation.
Have you understood the value of financial management?
Financial management holds a lot of value for any entrepreneur. Taking proper financial measures can save your business from critical loses and helps to enjoy the significant profit. As you track down your finances, you get an insight into your company’s current financial condition, upcoming expenses, profit margin, and much more. So, before it’s too late, spend some time and effort in finance management.