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How to Manage Money in a Small Business

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Last editedAug 20214 min read

A great product, killer marketing strategy and the best company culture can only get you so far; if you’re not managing your money well, your business can’t succeed. The importance of money management in business is undeniable, and it’s especially important to be extra cautious while your small business is still young - mismanaged finances can stop it from ever growing beyond infancy.

How to manage money in a small business

Small business money management is somewhat of a craft. It’s not only about filling out forms correctly and balancing the budget well, it’s also about having the right mindset and knowing how to expect the unexpected. Below are a few tips that will help ensure your small business finances stay healthy and geared for growth.

Be realistic

While optimism and motivation are key, it’s just as, if not more important to be realistic and pragmatic about your financial decision making. Every decision should be grounded in facts and data, and understanding that not everything will work out how you anticipated is a must. No matter how much you believe in your product or service and your ability to succeed, you should be prepared for mistakes, drawbacks and challenges.

No successful business has been flawless from the get-go, and the most successful businesses are the ones that were able to overcome unexpected pitfalls by managing their finances well even in the worst of times.

There’s nothing wrong with taking risks, so long as you stay realistic and have a plan in place if the risk doesn’t pay off. Accepting that failure is a possibility will help you devise contingency plans and financial solutions that can quickly get you back on your feet.

Know your market, monitor your competitors and make financial decisions that are sensible and logical for your business goals.

Forecasting is key

When planning for the future, it’s absolutely essential that you take some time to do financial forecasting.

To start with, conduct cash flow forecasting for the year ahead, or even for the next six months. Using a bottom-up forecasting method will help predict how you may perform in the future by using real data from your own business activity, while a top-down forecasting approach helps you recognise trends and movements in the wider market that you operate within so you know the steps you must take to succeed. 

After forecasting, you should have a more informed idea of whether or not your current approach is gearing you for success, and what you need to adjust. Bottom-up forecasting can tell you if you’re spending too much in one area while not giving enough attention to another. Perhaps you’re overspending on marketing, or need to realign your budget for increasing production costs – whatever it is, forecasting will help you identify solutions that can put your small business on the right track.

Keep it on the record

Good accounting from day one is crucial for the success of a small business. Whether you choose to hire an accountant or make use of a small business money management app in your early years of operation, it’s so important that you’re correctly and consistently keeping track of your inflows and outflows. Using an accounting app or software will be the cheaper option to start with, but make sure you choose wisely.

The best small business money management software will help you visualise your financial stature with intuitive charts and graphics, helping you monitor your spending and income and devise data-driven strategies. It will help you put together essential documents for financial reporting, like balance sheets, profit and loss reports, cash flow statements and so on.

You’ll be able to use accounting software to identify trends, strengths and weaknesses and adjust your approach accordingly.

Understanding your cash flow and reporting it correctly will not only help with managing your small business finances day-to-day, it can also help you secure funding in the future if you have a solid, accurate record of how you earn and spend, alongside accurate forecasting.

Have a safety net

While you’re getting your business off the ground, you may find that your expenses outweigh your earnings. This is to be expected, and if you anticipate this ahead of time and have a plan in place, you’ll be able to overcome this period of negative cash flow.

Try to start with a bit of capital – having some savings set aside will help you hugely.

When you plan your initial strategy, do so with the idea that you may not make any money in your first few months of operation. Whether you set up an overdraft, reserve a few months of savings, or seek early funding – make sure you’ve got enough capital to see you through a potentially dry spell.

Spend wisely

While you will certainly need to spend a bit to get the ball rolling, when managing finances for a small business you should be careful not to spend prematurely. You don’t need a company car from day one, or to blow your budget on marketing while you’re still developing the brand; in the early stages of your business, you should only spend on things that are absolutely necessary. Avoid unnecessary business trips and when you do need to travel, choose budget-conscious accommodation and transport.

If you need an office space away from home, don’t buy property – rent instead. This will save you a bit of money, and will make it easier to expand quickly when the business grows. The same goes for equipment and machinery – leasing is always a wise choice until you have steady revenue.

Stay on top of regular expenses like utility bills, and make sure you constantly review these costs to ensure you’ve got the best deal. You might find a few months in that switching to a new internet or electricity provider will save you money, for example. Keeping track of where your money is going and regularly assessing whether or not there are better options available is a simple small business money management tip that can make a big difference.

Make payments and take payments carefully

Expect debt, especially if you’ve been granted a loan – and know that debt is not a bad thing. Maintaining a good credit score is so important if you’re looking to gain further financial support, so keep on top of repayments and be diligent when choosing lenders. 

And while it’s important to ensure you’re making payments on time, it’s equally crucial to make sure you’re receiving payments on time. Be sure to send out invoices in a timely manner and encourage those you’re invoicing to pay you on time. You don’t want to be left in a poor financial state because you failed to follow up on outstanding invoices.

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Interested in automating the way you get paid? GoCardless can help

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