Many small businesses struggle with how to manage their finances. These are some of the basics to ensure your business remains afloat.
Your business depends on sales. Sales should continuously grow. So you need a system to continuously prospect for new customers. You also need a process in place to get the goods and services to the customer. Once a sales order is processed an invoice is raised, goods are delivered and cash is collected. It is ideal that cash is collected immediately. You may need to extend some credit to a few trustworthy customers. Limit the amount of credit given. Have a process to collect all outstanding receivables.
The pricing of your goods and services is also important. The price you charge should be able to recover the direct costs of production and distribution and a reasonable profit margin. No point charging a price when you are making losses. Business is not a charity.
You also need a process to manage the cash once received from the customer. Ideally you need to have a dedicated bank account for your business. This should be separate from you personal account. The cash collected daily should be banked. You can also use mobile money to collect all your sales proceeds.
Cash flow management
Cash is the lifeblood of any business. Without cash you can’t do much. Cash flow management is about managing the cash that comes in and the cash that goes out of the business. What you want to achieve is more cash coming in rather than going out.
Many small business owners don’t separate themselves from the business. As such money for tomatoes and onions comes direct from the business account. A business is a separate legal entity and should be treated as such. You should get a monthly salary from the business to meet your expenses. And you have to maintain discipline not to deplete the business account to pay for personal things. Have and stick to a monthly business budget as well.
Debt can kill a small business very fast if not well managed. If you borrow make sure you pay back in time. Also only borrow to fund capital investments. You may need a working capital facility to assist with sales growth and inventory. Try to get the cheapest financing you can afford to limit interest payments.
Inventory of goods ties down cash. Try to maintain the limited amount of stock to support sales for a week or two. If you can, only process or buy materials when a customer makes an order. This is what Toyota has perfected with its Just In Time production system. Cars are only manufactured when an order is made. Parts are only ordered from suppliers when a sales order is received.
You need a disciplined way of recording and tracking these things. I would suggest you hire a book keeper or an Administrator to keep proper records. It is the only way to know if you are making progress or not. There are several free online tools you can adopt.
PS. We shall be holding our third Money Talk focusing on how to Manage Finances for Small Businesses TODAY Friday 13th December 2019 from 6.00PM to 8.00PM. The Money Talk will be held at The Office Hive on 7th floor, the Cube, Kisementi, Cooper Road. Our guest speaker is Brian Amanyire who is a seasoned banker and finance professional. Brian was recently awarded the young CEO of the year award by the ACCA. For registration contact us on 0788 – 437543.