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Small Businesses: How To Manage Your Finances

Are you an entrepreneur or small business? Looking to keep your finances in check so that you can continue to grow? Learn these vital tips now.

Money management is a critical aspect of running a small business. By implementing smart financial practices, you can ensure the stability and growth of your company. 

I want to tell you about a range of strategies that will help you effectively manage your cash flow, optimise your payment plans, reduce costs, and protect your cash reserves. By implementing these tips, you can strengthen your financial position and achieve long-term success.

Targeting a Healthy Burn Rate:

Your burn rate represents the length of time your business can operate without generating sales while still having sufficient cash reserves. Aim to target a burn rate of at least 30 days initially and gradually increase it to 90 days or more. This ensures financial stability during challenging periods. Microsoft’s Bill Gates once aimed for a two-year burn rate during the early stages of the company, showcasing the power of strong financial planning.

Managing Cashflow Days and Cycles:

Understanding your cashflow cycle is crucial for maintaining financial health. The cashflow cycle refers to the time it takes for your business to deliver a product or service and receive payment. Minimise this cycle by renegotiating invoice terms, incentivising upfront or early payments, or offering instant deliverables that require immediate payment. By reducing the length of your cashflow cycle, you can improve cash flow and reduce financial risk.

Strategic Cash Management and Risk Mitigation:

Choosing the right banking institution is essential for managing your cash effectively. Spread your risk by diversifying your deposits across multiple banking groups rather than relying solely on one bank. Consider exploring savings accounts with competitive interest rates. Additionally, you can invest a portion of your company’s funds in well-established indices such as the FTSE 100 or S&P 500. Consult with a trusted financial advisor to determine the best investment options for your business while adhering to legal regulations.

Optimising Payment Plans and Upfront Cash:

Strategically designing payment plans and determining the proportion of upfront cash versus deferred income can impact your business’s financial goals. Offering incentives for customers to pay in full can improve your cashflow, while favouring deferred payments can enhance your company’s valuation or attractiveness for potential buyers. By aligning your payment strategies with your specific objectives, you can achieve both short-term cashflow stability and long-term business growth.

Balancing Drawings, Retained Earnings, and Tax Implications:

Consider finding a balance between drawing profits and retaining earnings within the company. Drawing all net profits may deplete cash holdings and increase your tax burden. Instead, determine a percentage to draw as salary, dividends, or drawings, while retaining a portion for future investments, expansion, or emergencies. Retained earnings can increase your burn rate and provide a cushion during lean periods. Seek professional advice to ensure you strike the right balance while adhering to tax regulations.

Monitoring Refunds and Bad Debt:

Tracking the percentage of refunds and bad debt is essential for maintaining financial stability. Aim to keep refunds and bad debt below 3% of your annual turnover. Analyse your sales process and customer creditworthiness to reduce the risk of unpaid invoices. Improving your conversion rate from sales to cash will boost your financial health without incurring additional costs. Focus on streamlining your sales and payment processes to ensure a smooth and efficient cash inflow.

Implementing Strong Financial Controls:

To safeguard your cash reserves, establish stringent financial controls within your organisation. Limit access to bank accounts and payment systems to senior staff or founders. Set spending limits on purchase orders and individual employee expenditures. Each department should have a predefined budget that cannot be exceeded without proper authorisation. By enforcing financial controls, you can prevent unauthorised spending and maintain a healthy cash position.

Reducing Costs and Fixed Expenditures:

Regularly review and reduce your costs to optimise your business’ financial performance. Implement a three-quote system for all expenditures and establish a purchase order system. Conduct quarterly financial audits to identify and eliminate wasteful spending, such as excessive staffing, unnecessary subscriptions, or unused services. Renegotiate contracts with suppliers annually to ensure competitive rates. Encourage employees to contribute cost-saving ideas by offering rewards based on the percentage of yearly savings they identify. Consider all cost aspects, including rebates, tax savings, fixed, and variable costs.

Effective money management is vital for the success and resilience of any small business. By closely monitoring your burn rate, cashflow cycle, payment plans, and costs, you can optimise your financial position and ensure long-term growth. Additionally, implementing strong financial controls and tracking refund and bad debt percentages will enhance your cash reserves and reduce financial risks. By following these strategies, you’ll be better equipped to navigate economic uncertainties and maintain a healthy bottom line for your small business.

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Written by Rob Moore

Written by Rob Moore

Rob Moore; host of "Disruptors” & a ‘disruptive' Entreprenuer:

He disrupted the property investing world, with over 1,350 property rental units managed/owned/sold
Became a millionaire by age 31
He disrupted the business world with public 3x longest speech world records
Disrupted books by being a best-selling author of 19 books on money, business & investing
14 companies &multiple 7 & 8 figure businesses
He disrupted the influencer world with his global podcast, Disruptors, with over 1,000 episodes & a community of over 3 million followers across all platforms

Rob's mission: to help as many people on the planet get better financial knowledge and help YOU make, manage and multiply more money through multiple streams of income


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