The bed rock of any business is making and managing money. Majority of businesses measure their success by the amount of money they have made. This is termed as the company’s turn over. Every coin has two sides, a head and a tail and it is no different in business. So as money is being made, so it is being spent. The art of making and spending money is the key to the survival of any business whether it is a one man show, an SME or a big blue chip company.
Financial Management is basically the process of taking care (managing) the fund in a business. Financial management involves a lot more than just keeping accounts and keeping track of bank statements.
In order to perform good financial management techniques in your company, you have to be able to perform some specific operation, namely
An estimate of how much is required to run the business effectively and efficiently. Also, what items to spend money on and their costs?
What will the money made in the business be used for?
Source of Funds
Where is the money to be spent in the business coming from?
What will be done with the excess money after all spending has be completed
Cash Flow Management
Ability to manage cash going in and coming out of the business
As a small business owner, it is very important to have an idea of how much you need each month to ensure the survival of your business and of yourself.
This simple knowledge of knowing what you need each quarter is vital. What we are saying is have a quarterly idea of what you are going to make i.e. a target and what to spend the money on i.e. a budget.
Knowing what to spend money on and what each item costs is essential to your business. Every time you spend money you are dipping into the funds that are used to run your business. So be sure you are spending on the right things.
Keep excesses to a minimum and be sure to pay very close attention to recurrent expenditure like fuel, utility bills and staff salaries.
Source of Funds
Every business is designed to make money. Even if you are a charity, you will need cash to run projects, pay salaries and keep you office running. The key to your business is making money from any which way possible. Knowing where your income is coming from is extremely important. Identify very quickly where your income streams are coming from and concentrate on the most important and the most lucrative one. Pick that line and focus on it.
Income streams can be loans, gifts, sales or even anything else that will increase your bank balance.
After all is said and done, whatever money is left in your account is either your loss if there is nothing left or your profit if you have money after all expenses at the end of each month.
If you have a loss, you will need to go back and revenue your expenditure and your sources of income with a view of reducing the latter, and more importantly increasing the former (source of income).
When you do start getting regular profit in your business, knowing what to do with that money is vital to the survival and growth of your business. Many SMEs tend to spend the business money as their own money, so end up squandering it on luxuries like clothes, parties and travelling.
In truth you should divide up the money into five parts:
- Enough for the next quarter if no money enters the business
- Enough for a holiday or personal treat
- Enough to open another location or hire another staff to expand
- An amount for buying shares or stocks or investing g in another totally different business.
- A fifth amount can be put aside to give back to the society.
The ratio in which the money is divided depends on your current situation but no section should get less than 5%.
Cash Flow Management
As you run your business, money will come in and money will go out. It is of the utmost importance that you keep an eye on this flow of cash. Do not spend any money on any item without writing it down or entering it into your system. The same thing applies to any money made.
Monitoring cash flow is the life blood of any business especially small businesses. Knowing what goes in and what comes out of your account regularly is paramount. This can help you forecast business trends, eliminate waste, discover frauds and make important strategic decisions on cost savings.
As a financial manager, which is what every CEO or MD is, you will have to be responsible for all money that passes through your business.
Be sure you have a handle on your source of funds. ‘’No money No business’’. You must remain the financial manager of your company till the day to retire and hand the business over to your successor.
Even then you should keep checking on the finances of your business.
This content is provided by Bola Maduka