Managing the finances of your business is one of the most important decisions you have to make as a business owner. It can either make or mar your business. Poor financial management can lead to the demise of your business.
In today’s article, we will be sharing some valuable tips that can help you manage the finances of your small business. This article is a recap of the “Managing Finances In A Growing Business” webinar series, facilitated by Israel Koledowo, our Head of Finance for Africa. You can watch the video on our YouTube channel, to get updates on new videos that can help you grow your business, kindly subscribe to the channel.
Financial management is the planning and control of financial undertakings in a business. It could be as simple as you just knowing your inflows and outflows. It helps you have a complete overview of the health of your business.
How do you know when you are making a profit or loss? You can only know this when you keep proper track of your finances.
Financial management gives you insight into how your business is doing based on pricing, it can also guide how you set prices for your products.
Keeping proper financial records can be very helpful when you need to get a loan for your business. Many small businesses have difficulty getting loans from financiers (banks, microfinance banks et al.) because they are quite familiar with some of the reasons small businesses give. You as a small business owner will need to tell them something really specific that will make them see why you should be given the loan. For loan providers, it is all about the numbers, the numbers must add up for them. If your business isn’t viable based on their previous experiences, you won’t be given the loan.
SMEs (Small & Medium Enterprises) are the life of every economy, they contribute about 70% to the (GDP) Gross Domestic Product of a country. Your growing business is important to the economy of your country. However, the majority of small businesses fail in their 1st 5 years, only very few succeed beyond the 1st or 2nd generation.
Common Threats To The Survival Of Small Businesses
- Poor management practises
Poor management practises is a major reason a lot of them fail, business owners make a lot of wrong decisions that end up killing their business. You should be able to separate yourself from the business. The business is not you and you are not the business. Don’t think because you own the business, you can always dip into the money the business has made. Putting yourself on a salary structure is part of managing your finances properly. You can place yourself on a salary based on how the business is doing. This doesn’t have to be from the profit you have made, you can make it part of the capital. It should be a fixed amount and you should be disciplined enough to stick to it.
- Sentimental employment policies
Most times we employ friends and family to work for us but sometimes, it may not be the best decision. Many business owners find it difficult to fire family members who are not adding value to their business. This is one of the reasons bigger companies have policies in place that prevents senior management from having someone related to them work in the same unit as them or in some places, in the same company.
This is also a major threat, not having enough financing for the business or not being able to manage what you have effectively. You have to be completely honest and serious about the financing of your business.
- Lack of Projections
This is proper planning for the business – next 6 months, 12 months, 2 years. This is about planning properly to know what the business will need; how much will you need to successfully run this business in the months to come. Will you have enough money to run the business even if you do not make a profit for the next 6 months? Or as the pandemic has taught us, will the business thrive in a pandemic or a disaster?
For an average business, it takes a minimum of 5 years to make a steady flow of income that covers your costs, of course, there are outliers.
- Marketing Needs
Do you know how best to sell your products? Do you know if people need this product? Have you done enough research that informs your decisions about location, price and customers?
Managing Finances In A Small Business
The 1st few years of any business are very vital, you need to be intentional about everything in the business. The natural order of life is chaos, if you refuse to structure your business in the early years, it will ultimately affect your business.
Here are some of the things you can do as a small business owner to stay on top of your finances:
- Pay yourself
This can’t be overemphasised, it should very hard for you to dip your hand into your business finances for personal needs. It has to be very deliberate and you need to be consistent. See yourself as an employee of the business and put yourself on a salary.
- Invest in growth
It is not all your profit that should be spent, a large portion of your profit should always go back into growing the business. This is better than requesting a loan from anyone. This really helps to expand your business, grow your product lines and improve the quality of your products.
- Monitor your books
You have to be very intentional about monitoring your books, it can be as simple as possible; the most important thing is keeping the records. Make sure you write down your expenses, inflows and also find time to analyse what you have documented.
When you want to get a loan, good bookkeeping will always be important; financiers want to see how diligent you have been with your records, this will help them make a decision.
- Set up good financial habits
Be extremely disciplined with your finances, refrain from frivolous spending and make sure you run a lean organisation. Establish internal financial protocols for your business.
- Plan ahead
Always have a well-documented plan for at least the next 6 months. Do you have enough capital for the next 6 months? Do you need to cut down on some expenses? Do you want to get a loan from friends and family?
There will always be business issues that need to be sorted out immediately but when it comes to finances, you need to plan adequately.
Your growth is our growth, we want to help you grow your business and this is why we are having these sessions to teach you practical lessons that can help you grow. You can see videos from the previous webinars here, watch them and we’re sure you will find them valuable.