There is nothing more important to the operation of your business than sound financial management. But more than just keeping your business operating, managing money better can improve your profitability, grow your brand and strengthen your customer base. Follow these helpful tips and master your money management skills.
Managing business finances is a necessary and often overlooked part of a business’, day-to-day operation. And while some business owners are content to do only what’s necessary, taking a more active approach to managing money could improve a business’ profitability.
A review of research into small to medium sized businesses published in the Journal of Small Enterprise Research shows that companies can improve their profitability by better managing their working capital and freeing up liquidity.
One way to achieve this is to speed up the cash conversion cycle – that is how successfully your business can generate cash from invoices and receive cash from debtors and customers.
To speed up the cash conversion cycle in your business, have firm procedures in place to control vendor remittances, petty cash balances and customer receipts. Invoice as soon as practicable and ensure invoices clearly state the payment terms.
Implementing an automated billing and invoicing process can lead to faster turnaround times for receipt of cash. Follow up late payments regularly and always cross-reference invoice numbers with payments so that you know what has already been paid.
Asking suppliers to sign agreements to pay within seven days puts you in charge of your working capital. The sooner their funds are received, the sooner you can pay your own debts, order stock or upgrade your business.
Similarly knowing customer’s payment habits and the date which they get paid will allow you to align your billing procedures to coincide with their spending habits and enable you to receive customer payments sooner.
Efficiently managing stock is another proven way to decrease the time between cash cycles. Remember that inventory sitting in a storeroom is essentially working capital not working for your business. On the other hand, not enough inventory available to your customers is missed opportunity for profit.
Regular stocktaking is crucial to inventory management, as is preparing an annual inventory budget. The budget should include the total cost of ownership including, materials cost, logistics costs, redistribution costs and fixed operational costs.
If stocktaking is too time-consuming, think about implementing inventory optimisation technologies such as that offered by the software EazyStock – that can speed up the time spent replenishing and planning inventory by 60 per cent.
It goes without saying, your spending should be frugal and sensible. Avoid overspending on items or services that have little or no return on investment such as luxurious transport and accommodation, or expensive meals with clients.
If you are an owner operator, pay yourself first. The salary should not be overly generous to avoid cutting into much needed working capital – start with no more than 10 per cent of annual earnings and increase it as your business becomes more profitable.
Use profit and loss tracking as a way to keep tabs on the financial health of your business. Analyse statements and balance sheets and take particular notice of key performance indicators (KPIs) such as stock turnover, debtors turnover, current ratio, debt/equity and interest coverage.
Sort through these statements quarterly and identify sections where you can slash your expenses and increase your profits. Benchmarking against competitor companies can reveal key areas of your business you could make savings in.
Some ideas include: outsourcing your marketing and web design or shopping for freelancers. Other cost saving ideas include keeping printing to a minimum, ordering business cards online and using online legal document templates for simple legal documents.
A survey of 1000 small to medium businesses in Australia by software provider CCH found that businesses were most likely to a fail when business owners neglected to manage costs and anticipate rising costs. So be sure to have a savings plan in place to act as a contingency.
By mastering these key aspects of money management your business is bound to become more profitable in the medium to long term.