Money Management Basics for Small Business

"Money is a good servant but a bad master." ~Quoted by Bacon

One of the most important aspects of managing your own business is managing its money. Your success and profitability hinges considerably on how you invest and spend money into your business. You should use money in the most productive and profitable way like a good servant.

Here are a few money management basics that any entrepreneur must know and have:

Bookeeping Know-How

Regardless if you have stumbled on a niche that you think you have no competitors, if you have the best product or service to offer, if you have plenty of money in the bank to use as a buffer for your business, if you a large following of loyal customers, if you don’t know how your cash flows, you will eventually close shop. Successful entrepreneurs are first and foremost good money managers. You need not to be an accountant to know the basics of accounting. You just need to know the fundamentals of cash flow, inventory management, AR (Account Receivables), assets and liabilities, and how your payment gateway and credit card facility work.

Moreover, you need to know how to read your balance sheet and income statement and be able to tell where your money is moving. Watch your cash flow carefully, especially your positive cash flow that there should be more money coming-in than coming out. If your company is releasing more money than what it is generating (negative cash flow) you are managing it towards bankruptcy. Do not just rely on what your accountant is telling you, if you have one, monitor and analyze your cash flow.

Invest on Assets

What are assets and liabilities? In simplest terms, assets are those things that generate money for your business, while liabilities are those things that suck-out money from your business. So do you really need brand new and expensive furnishings for your office or do you really need a huge store or office space? If these things will not help you generate more money, then they are among your liabilities. People or systems, on a broader sense, if they are not helping your bottom line can also be classified as liabilities.

Capitalize on assets. If you are familiar with the Pareto Principle, which states in the business context, 80% of your income comes from 20% of what you are doing. This 20% is your asset, focus on and nurture it.

Strengthen your Collection System

More often, B2B or business-to-business transactions are not done on COD’s (cash on delivery. Thus, in this case, you must have a concrete payment policy that you need to make known to your client and make them agree. Monitor your AR carefully and ensure that payments are collected on time.

Separate your Personal Finances

If you are buying an insurance, by all means do not use your business fund. Similarly, all other personal money matters and transactions should be removed from your business’ books. This way, you can clearly see how your business is performing.

There are other money management practices that you need to learn, however in the beginning it is sufficient that what I have enumerated above should at least give you a firm grasp on your business finances. Lastly, you might want to consult a finance expert from time to time to give a you a better perspective.