PERSONAL FINANCE: Tips to help you manage your business money

Don’t let your financial situation collapse a business that has potential to grow. PHOTO | FILE| NATION MEDIA GROUP

What you need to know:

  • Resist this temptation to spend more than you make. Many businesses have found themselves in problems because of expenses that have gone out of control.
  • Let business spending be about growth and not just because there is money in the account.

Does the handling of money in your business give you sleepless nights? Yes, it can be tricky but we have to do it. Here are a few tips to put you on the right track when it comes to your business finances.

1. Separate your personal money from your business money. This is a key reason why many businesses do not grow. Remember this: You are not your business and your business is not you. In fact, you are considered two separate legal entities if you have registered a company. When your business makes money it does not necessarily mean that you have made money. If your business sells goods worth Sh100, 000 it does not mean you have personally made that money. Those funds will be used to pay for various business expenses such as raw materials, transport, rent, salaries, etc. Business expenses should be your priority, not your personal expenses. In other words, your house rent is not a business priority. That said, because you use your time and skills for this business, you should be amongst those business expenses. You should pay yourself. Then from what the business pays you, you can pay your personal rent. Many of us claim we cannot pay ourselves – but we take money from the business for personal reasons in an ad hoc manner. We walk around with the company credit card and withdraw from the bank account as need arises. Don’t do this. Pay yourself a salary and hand your business accounts over to the business.

2. Have a reserve fund. You may not be able to do this at the start but in time, the business should be able to generate savings. This money is the business’ emergency fund. You can use this for actual business emergencies or to take advantage of certain opportunities that may come your way. This buffer will also help in temporary situations that could affect sales of your goods or services. You will be able to rely on that buffer to sustain the business instead of taking drastic measures. There are some businesses that have rushed to cut down on staff only to realise they need to rehire three months later. Also have an emergency fund for your own needs so that you do not raid the company account. From what the business pays you, save and set up for a rainy day.

3. Keep financial records well. No matter how big or small your business is you must record everything that goes in and out, even if you started yesterday or the business is still a side gig. Many people run business by looking at their bank account instead of their accounting books. As one person told me, as long as they see money in the account they know they have money to spend. However they have no concept of how much money the business makes or loses in a given period. When you know how much the business has made in a month and you know how much it has spent, you will obviously know whether you are making a profit and if it makes financial sense to keep going. You will also know how much you need to sell (goods and services) to stay profitable. You will also know when it is time to cut down on expenditure. You will be able to plan for the future and allocate resources. You will be able to access credit and raise investments based on proper financial records. You will also be able to tell how much money you need to grow. You will be able to tell whether you are pricing your products properly. Financial records also help ensure that you are tax compliant at all times.

4. Cash is king. Match your payments to receipts. At the end of the day, you can boast about your revenues and even your profit but the tangible reality is cash flow. If you pay faster than you receive money, you might look profitable on the books, but you will not have cash to run the business. As you build your relationship with suppliers, try to get them to allow you to pay as you receive money. Alternatively, secure deposits from clients where you can to cover any cash outlays you need upfront. You can also get credit facilities like overdrafts from banks for this and factor it into your pricing. Whatever methodology you use, watch that cash flow and be wary of the imbalance between receiving money and paying out money.

5. Watch those expenses. Resist this temptation to spend more than you make. Many businesses have found themselves in problems because of expenses that have gone out of control. Let business spending be about growth and not just because there is money in the account.

 

Waceke runs a course on entrepreneurship. Find her at [email protected]| twitter @centonomy