Mar 06, 2020
Financial management is among the most crucial responsibilities of business owners and managers alike. If you are in such a position, you must do well in considering the possible consequences of any management decision on cash flow, profit, as well as your company’s financial status.
What’s more, all activities carried out on each aspect of the business will impact on the financial performance of the company – all these have to be controlled and evaluated. This write-up offers all the essential financial management tips for precise management of the money coming in and going out of your business.
Have a contingency fund
With small businesses, only as low as forty percent churn out monthly profits. In fact, only thirty percent manage to break even, whilst the remaining thirty percent end up with a loss. Thus, every business must have a clear idea of their numbers in terms of revenue and expenditure. One tip that does not fail is having a contingency fund handy – by so doing, you will be successfully buoyed during your downtime.
Furthermore, you will be able to gather your back up funds through disciplined savings – religiously funding your savings account monthly until you achieve a tidy sum. This kind of emergency fund should not be touched unnecessarily; rather, it should sit in an account, earning interest. Better still, you can create a fixed deposit account for higher interest and only tap into the fund when unforeseen circumstances come knocking.
Create your budget and manage it
Many business owners are averse to budgeting; according to them, the process of adding up income, listing out expenses and ensuring that everything tallies are so boring. However, even if you are not good at money management, you simply cannot downplay the importance of budgeting. Thus, you need to create a business budget if you don’t have one already. A budget to a business is like windshield wipers in the rain; you just can’t do without it. Even sticking to your budget 100 percent, will prove a bit hard to accomplish at the initial stage, but the end result does pay off.
What’s more, when armed with a comprehensive budget, you will be in a better position to view the financial situation of your business with full transparency and clarity. No doubt, it is the initial step that helps an entrepreneur in paying off debts and commencing disciplined savings for future expenditures like buying a vehicle, mortgage, and the likes. Furthermore, the major benefit of budgeting is that it balances your financial life, giving you peace of mind in the process.
Save up money for all big purchases
When you are able to delay indulgence, it will aid your financial management skills. Putting off the procurement of large purchases as opposed to sacrificing vital essentials or going the credit card way, will likely give your business the ample time and opportunity to evaluate and decide whether certain items are actually necessary. Besides, you will have enough time to go around and compare prices. And with the passage of time, some savings can be accumulated for the eventual purchase of the item.
This way, your business will be better off and you won’t have to resort to a bank loan or be saddled with credit interest to payback. Again, if you manage to accomplish the purchase with only savings as opposed to skipping more pressing obligations and bills, then the many consequences of not paying those bills will not be staring you in the face.
Put a limit on all un-budgeted spending
A simple sum-up of expense minus income is a vital part of your monthly budget. If you have money left after the calculation, then you can go ahead and use it on entertainment, but this has to be done to a certain extent. Any expense that is not part of your budget may harm your next month’s performance, especially if you overspend. So, before embarking on huge purchases, ensure that it will not interfere with the planned expenses.
Be sure not to commit to new recurring monthly bills
There are many loans your business should avoid at all costs even if your financial status and credit history qualifies you for them. Many entrepreneurs erroneously believe that no financial institution would give them approval for a facility they cannot afford. However, we have to take note of the fact that banks only know what you tell them and what is accessible from your credit report.
There may be so many other obligations that will likely prevent you from meeting the payment terms that the bank may not know about. And since it is only you that knows the full details of your debt obligations, the onus is now on you to take the decision of whether you can afford an additional monthly loan repayment on top of the ones you already have running.
Clear your debts as at when due
Imbibe that habit of clearing debts on time; don’t wait for your creditors to come looking for you. Besides, the hassle that comes with additional charges for late payment is never palatable. While you get your debts cleared, also endeavor to get secure business credit. It is only when we go through difficulties in accessing financing that we will understand the importance of having a good reputation with respect to debt clearance.
Separate your business from personal finances
There is always this ever-present temptation of using business money for personal purchases and vice versa. This is especially true at the start-up level. When you succumb to such choices, your ability to effectively keep track of all streams of income will be impaired. So, as you are launching the business, be sure to open a separate personal account equipped with its own credit card.
The more money you risk, the better your expected returns – this is the key to understanding IRO (returns on investment), which is also referred to as a ‘risk-return trade-off’. To further clarify, bonds and stocks are investments with higher ROI with a commensurate higher risk of saying goodbye to the investment capital, while money market accounts and certificates of deposit promise lower ROI with a lower risk of losing your invested capital.
Since tomorrow is unpredictable and no one is sure of the investment that is likely to do well, spreading out your risk will cushion the effect of one investment that goes sour, and the impact it may likely have on your overall portfolio won’t be much.
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