Managing the Money

Managing the money in business is absolutely paramount to success and will ensure you have enough liquidity (cash/assets that can easily become cash) to pay your outgoings (accounts payable). Strong financial management can also present future opportunity, with a healthy cash position enabling you to invest in potential future growth opportunities as and when they arrive.

Budgeting and Forecasting

One of the key ingredients to managing the money in business is understanding your business’ financial makeup is to generate a budget/financial forecast.  Within such a forecast you will need to consider the following core elements:

1. Expenses – There are essentially two key categories of expenses in a business context: overhead and operating expenses.
   1. Overhead expenses – Overhead expenses are costs that don’t relate directly to a product/service being offered. They represent more static costs and are associated with general business functions e.g. facilities costs. Overhead expenses are often regularly reviewed by organisations when looking to reduce cost e.g. by downsizing premises or reviewing and negotiating price on supplier contracts. Such reduction in cost can then have a requisite benefit on profitability.
   2. Operating expenses – Operating expenses are direct costs and accrue directly in relation to a business’ operations. For example operating expenses for a manufacturing company would include the direct materials, labor and machinery used to produce a product. Often companies will look at operating expenses as a means of securing competitive advantage, however utilising cheaper materials, or questionable employee contracts can often lead to a significant decline in reputation and therefore a balance needs to be struck between quality and price.
2. Projected Revenue and Break even – It goes without saying that you should understand what your break-even point is and thus when you will start to tick into a profit. To find your break even you will need to understand all of you fixed costs and then divide this by your contribution (selling price minus variable cost).
   1. Fixed costs – A fixed cost is a cost that does not vary in accordance with the amount of goods or services that are produced or sold. For example rent on an office premises is constant regardless of output.
   2. Contribution – Contribution focuses on the return each product or service generates for the business following a sale. It is calculated by taking the selling price minus the direct cost (operating expenses) incurred producing/delivering the product/service.
   3. Finding the break-even point – Once you have your fixed costs and contribution you simply divide your fixed costs by your contribution in order to get your break-even point. Such a point gives you the number of units of a product/service that you have to sell in order to cover your fixed costs.
3. Potential Seasonality – Seasonality considers the likelihood of variability in your sales dependent on the time of the year and/or some other regular recurring event that increases your business’ sales volatility. For example, many retailers enjoy a significant bump in sales during the holiday periods due to increased market activity, whilst a firm specialising in water sports is likely to see little action during the colder months vs the warmer months. Planning for this is paramount, so you can ensure you have the right financial tools in place and /or sufficient cash reserves to deal with any sales variability.
4. Cash flow and credit terms – This is a big one and is a constant thorn in the side of many small businesses in their infancy. Businesses can very well be profitable, but if they are not collecting cash from their sales (accounts receivable) then they will be unable to pay their suppliers and other direct costs (accounts payable). Enforcing strict payment terms with your customers whilst seeking to negotiate favorable payment terms with your suppliers is the key to generating a healthy cash position. You will also need to be vigilant with your customers and ensure you have an effective debt collection process whilst looking to do as much business as possible with those customers who pay on time and enforcing stricter terms (such as cash upfront) on those using your business as a bank!

Following your budgeting process you will be in an excellent position to begin looking for the best possible business bank account to fit your requirement. For example, you may have identified through your budgeting and forecasting process that your business may be subject to a significant degree of seasonality and thus an account that offers flexibility in the form of well priced overdraft facilities and/or short term working capital loans would be your best bet.

Keeping track of your financial data

In the beginning it would not be prudent to jump straight in to using a complex accounting software when managing your money and hiring a professional accountant to do it all for you is likely to be cost prohibitive.

Using a basic spreadsheet tool therefore is often a good first step (Google Sheets or Microsoft Excel would work well). These tools will allow you to build a basic model to track and monitor the financial performance of your business during the early stages (see our Financial Forecasting and Price Modeling section for more details). However in the event your business starts to grow, it is likely that it will quickly outgrow a manual and time intensive spreadsheet process and thus some form of accounting based software is likely to be a good bet to manage your finance going forward.

There are obviously plenty of different software solutions out there. It would be good practice to take a look at our Sourcing and Supplier Relationships section and potentially, given the importance of the software to the business going forward running a tender exercise to ensure you retrieve the greatest value for money whilst also having a software solution which can scale with your operational growth.

You may also like

Financial Forecasting and Price Modeling Business Plan Sourcing and Logistics Marketing