The importance of managing your finances as a business owner

Managing finances efficiently is often deemed the most significant driving force behind the success of small businesses. No matter the size of your business, it is important that finances are allocated and used efficiently; this practice could ultimately maximise profitability! More often than not, the common denominator of business failure often stems from avoidable issues…

Ash Hall
Head of Product

Sep 25, 2020
6 minutes read

Managing finances efficiently is often deemed the most significant driving force behind the success of small businesses. No matter the size of your business, it is important that finances are allocated and used efficiently; this practice could ultimately maximise profitability! More often than not, the common denominator of business failure often stems from avoidable issues linked to the inefficiency of financial management and insufficient cash flows.

There are around 400,000 businesses incorporated in the UK every year. Yet, only two-thirds of them can retain their market presence after the tenure of 3 years, and only half of those will remain competitive after five years. Businesses struggle not because of the lack of customers or poor quality of the goods & services offered, but rather the lack of cash in their hands.

The key to business freedom is cash – a lack of money in the hands of business owners and its game over in retaining market presence, let alone sustaining competitive advantage. Managing finances should be regarded with the utmost importance and recognition by small business owners when it comes to day-to-day decisions, thus, at least anticipating or avoiding cash flow crisis’ altogether.

To manage your finances efficiently, you must keep an eye on your cash flow. It is essential for seasonal businesses to track and operate cash flows is imperative and correlated with success.

Given the importance of cash flow management and increased efficiency of finance management, here is a guide providing five tips that could save your business, increase financial development and better your understanding of cash flow management –

Manage & track business activity using cash flows

Cash flows record the money going in & out of business. When you sell products to your customers, cash comes in, and when you pay wages, salaries, rent and monthly loan repayments, money goes out of your business. Business owners should update this activity as and when these transactions occur, this allows accurate time information and real-time access to your companies’ financial position.

Positive cash flow

When the income you are receiving is more than what you pay in expenditure, your business is running a positive cash flow. It would be best to keep your cash flow positive to retain your presence and pay bills and costs that may arise within business tasks unexpectedly.

Negative cash flow

When the expenditure you incurred is more than what you are receiving in income, your business runs a negative cash flow. There may be times where you experience negative cash flow but don’t panic! Suppose your payment from a customer is overdue or you needed to purchase new machinery. In that case, you can cover this cash flow shortfall by taking short-term loans or availing of bank overdraft facilities. Negative cash flows are not the end of the world and do not always cause serious consequences. The key is ensuring that you recover and transform those negative flows into positive cash flows. Generally, the cash flow period is forecasted over future months, quarters or a year.

Ultimately, the record-keeping and the constant updating of cash flows is essential because it will create a better and more informed insight into the company’s current financial position. Business owners can analyse these incomes and expenditures and recognise what to spend next or cut back on. Cash flows will ensure that managing finances efficiency will increase and contribute to a business’s sustainability and longevity.

Manage & track business activity using cash flows

Today’s climate recognises that businesses rely on cloud accounting software or work with an accountant to perform day-to-day accounting tasks well.

Tips for ensuring these accounting basics are simplified:

• Choosing the right cloud accounting software is essential; it’s possible to save time and accounting expenses; Nomi can help in this respect.
• Opening of a separate business bank account
• The hiring of a skilled and experienced accountant if there is too much for you to handle

Financial planning & forecasting for small businesses

Financial documents play an essential and crucial part in the success and growth of your small business, as it helps in proving your businesses viability to both investors, and finance providers. As a small business owner, you must create financial plans and forecasts to identify any potential issues in the future. It not only identifies future difficulties but can provide risk assessment and managing of expectation initiatives. Here are four of the leading financial planning & forecasting documents that a small business owner may need to deal with and make sense of:

• Profit and Loss statement
• Balance sheet
• Cash flow statement
• Break-even analysis

Managing small business debt

Debt is considered a helpful tool, especially for start-ups and business growth. The majority of small businesses rely on debt financing to run their business operations. Every company will deal with issues such as; late payment from a customer, market downfalls, fall in sales etc. Debt financing is considered the most suitable instrument to manage small business debts more effectively and efficiently. If you are running a small business, then you will need cash sooner or later. You must take the following steps to manage your money effectively and efficiently –

• Avoid paying for unnecessary expenses and run your business effectively
• Create a fund for unforeseen and unexpected circumstances
• Keep the focus on increasing business revenues
• Negotiate with your suppliers as well as asking for maximum discounts on bulk orders
• Consider the option of refinancing.
• Boost your credit score to qualify for future business credit. Paying for short term loans, credit card payments or property or equipment lease can boost your credit score.
• Repay your debts by raising funds through family, friends, investors and selling non-essential company assets

Identify small business finance options.

Business owners must identify various funding options to deal with short term cash flow issues or grow their business in the future. There are different funding options available for small business owner depending on the nature of their business. There are also options depending on the challenges faced or opportunities ahead. Ways in which you can raise money and manage your business operations effectively and efficiently are –

• Raise money with bank loans
• Short term business loans
• Raise money from the general public via crowdfunding. Use crowdfunding platforms such as Indiegogo, Kickstarter, GofundMe.
• Sell your unpaid invoices at discounted rates & receive cash upfront (Invoice financing)
• Apply for small business grants often given to small innovative businesses as a reward or to those who need direct cash or discounts
• Use of business credit cards
• Seek investments from venture capitalists (Venture capitalists are professional investors that primarily invest in start-ups with high growth potential to help the growing business and to receive a maximum amount of return)
• Ask for help from the government’s enterprise finance guarantee scheme that guarantees up to 75% of the loan value. Small businesses that don’t qualify for bank lending can access this scheme.

We hope that these points will help manage your finances effectively and efficiently and help in the growth and development of your business in the coming future.