Managing finances efficiently is often deemed tobe the biggest 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 couldultimately maximize profitability! More often than not, the common denominator of business failure often stems from avoidable issues linked to the inefficiency of financial management and poor cash flows.

There are around 400,000 businesses incorporated in UK every year, yet only two thirds of them are able to retain their market presence after the tenure of 3 years and only half of those will remain competitive after 5 years. Businesses struggle not because of the lack of customers or poor quality of the goods & services offered, but ratherthe lack of cash in their hands.

The key to business freedom is cash – a lack of cash in the hands of business owners and its game over in terms of 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 the day to day decisions thus, at least anticipating or avoiding cash flow crisis’ all together.

The prior experience of running a successful business or the business owner’s knowledge cannot be compared or measured in any other way than that of their ability to manage cash flows. Whether looking at an entrepreneurs first start-up compared to that of 30th SME of an experienced business owner - what really matters most in the long runis the efficient managing of their finances. In order to manage your finances efficiently, you must keep an eye on your cash flow. It is even important for seasonal businesses too, tracking and managing cash flows carefully is imperative and correlated with success.

Given the importance of cash flow management and increased efficiency of finance management,here is a guide providing 5 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 coming in & out of a business. When you sell products to your customers, cash comes inand when you pay wages, salaries, rent and monthly loan repayments, money goes out of your business. This activity should be updated as and when these transactions occur, this allows real time information and real time access to your companies’ financial position.

Positive cash flow

When the income you are receiving is more thanwhat you pay in expenditure, your business is running a positive cash flow. You need to keep your cash flow positive in order to retain your presence and to pay bills as well as 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 is running a negative cash flow. There maybe times where you experience negative cash flowbut don’t panic! If your payment from a customer is over-due or new machinery has been purchased, you can cover this cash flow shortfall by taking short-term loans or availing bank overdraft facilities. Negative cash flows are not the end of the world and do not alwayscauses serious consequences. The key is ensuring that you recover and transform those negative flows into positive cash flows. Generally, the cash flow period is tracked over specific months, quarters or a year.

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

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 the day to day accounting tasks well. When running your business, its important to perform these time consuming and unavoidable tasks such as bookkeeping, accounting and tax calculations that not only keep your business safe and compliant in the eyes of HMRC, but also generate valuable information that is necessary to the running of your business in a more effective and efficient manner.

Tips for ensuring these accounting basics are simplified:

  • Choosing a right cloud accounting software is important, it’s possible to save time and accounting expenses, Nomisma can help in this respect.
  • Opening of a separate business bank account
  • Hiring of a skilled and experienced accountant if there is too much for you to handle
  • Knowledge of small business accounting terms such as bookkeeping, annual accounts, self-assessment income tax, corporation tax, VAT, income tax rates, PAYE.

Financial planning & forecasting for small businesses

Financial documents play an important 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 in order to identify any potential issues that may arise in the future. It not only identifies future difficulties, but is able to provide risk assessment and managing of expectation initiatives. Here are four of the main 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 of small business debt

Debt is considered a useful tool, especially for start-ups and business growth. The majority of small businessesactually rely on debt financing in order to run their business operations. Every business will deal with issues such as; late payment from a customer, market downfalls, fall in sales etc. Debt financing is considered as 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 cash effectively and efficiently –

  • Avoid paying for unnecessary expenses and run your business effectively
  • Create a fund for unforeseen and unexpected circumstances
  • Keep thefocus 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

It’s essential that business owners identify various small business funding options in order to deal withshort term cash flowissues or to grow their business in future. There are various funding options available for a small business owner depending on the nature of their business. There are also options depending onthe 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 crowd funding. Use crowd funding platforms such as Indiegogo, Kickstarter, GofundMe
  • Sell your unpaid invoices at discounted rates & receive cash upfront (Invoice financing)
  • Apply for small business grants which are offered 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 mostly invest in start-ups with high growth potential in order 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 who don’t qualify for bank lending can access this scheme.

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