Wednesday 20th of December 2023
Business failure is the brutal truth that most aspiring entrepreneurs forget to consider while pu
...rsuing their dreams. However, it is not uncommon f...
Business failure is the brutal truth that most aspiring entrepreneurs forget to consider while pursuing their dreams. However, it is not uncommon for losses and deficits to seep into the bottom line and lead to bankruptcy. The primary reason for this is the mismanagement of capital through increased budgets, redundant spending, and bad investments. Thus, entrepreneurs need to understand financial management before they begin operations.
Financial management is the backbone of an entity and can make or break its future. However, it is not an easy task and requires balancing the inflow and outflow of cash in the organisation while maintaining substantial reserves. It is needed to generate profits and help the business grow. It helps to avoid failure and strengthens the financial health of the business. So, here are a few tips that will teach you to manage small business finances effectively and stay ahead in the cluttered market.
Planning is the first step of running business operations. Thus, it is essential to prepare a budget for every quarter with the help of the bookkeeper or accountant. Start-ups can use projections for sales and cost estimates to create the budget. Similarly, an established business uses its past sales figures and expenses to create the plan.
It is vital to allocate the required capital to all the departments for various activities and tasks, such as procurement of stock, buying equipment, paying or lease and utilities, etc. The managers and business owners should not exceed the limit to complete a task. Also, the budget should have room for unexpected expenses. Going overboard with expenditures can cost the business dearly.
Most entrepreneurs keep reinvesting the profits into the business to stay on the growth path. Although it is a promising approach, it does not leave the organisation with any savings. Cash reserves are highly significant in sustaining the business in case of a financial loss, economic downturn, or sudden dip in sales.
If you plan to purchase a business for sale in South Africa, you must check the financial stability with the help of the available cash reserve. So, financial management must involve saving the surplus capital to be used for the rainy day. Avoid spending it on unnecessary parties, renovations, and travels. Let the cash reserve grow and provide support in times of need.
Ask your accountant for advice when you plan to invest. Whether you wish to purchase equipment or any other asset, it is highly recommended to look at the financial reports, profitability and the available capital. Don’t make any decisions without understanding their impact on the business.
For example, if buying essential equipment can lead to a deficit, you can lease it. Thus, make sure you weigh the risks and make informed financial decisions. It is always beneficial to think about growth and invest in the business. However, the investment should not come at the cost of losing stability.
Keeping track of the incomings and outgoings is essential for the business owner. They should assess all the financial reports regularly and identify their patterns. It is vital to ask the accountant for insightful inferences from the data analysis and use the information to make amends that improve cash flow.
In addition, you must have financial goals which should be specific, realistic, achievable, and timely. Planning will help you to have a sense of direction and align your financial goals with the business goals. Another vital thing to do is to prepare for the tax season in advance and avoid last-minute stress and confusion.
The corporate credit card has no personal obligations or affects the owner's finances. It has a separate business account which allows you to maintain complete transparency for expenditures. With a defined upper limit, you cannot exceed the budget.
With a corporate credit card, you can maintain a high credit score and reduce the risk of fraud by employees. Also, the credit limit of corporate cards increases as the business starts growing, so you can spend more when required according to the needs of the business. So, when you acquire a business for sale in South Africa, secure a business credit card before starting other activities.
Small businesses need a good credit score because it helps them gain the confidence and trust of suppliers and lenders. The entrepreneur can get a reasonable interest rate while lending with a positive credit score. It is vital to maintain this score as financial constraints can lead to business upheavals.
Thus, you must track your credit report to keep it updated and pay the debts on time to avoid any delays or defaults. It will help you to improve your relationships with suppliers and lenders.
Financial management cannot be handled by the business owner who has several responsibilities on his shoulders. Thus, they need to hire professionals and use technology to automate the time-consuming number crunching tasks. The business needs to have an organised recordkeeping system and filing system to track profit and loss, invoices, bills, incomings, outgoings, tax bills, contracts, etc.
Using cloud-based accounting software helps to automate a variety of tasks besides the usual recordkeeping, financial reporting, and invoicing. These include stock taking, payroll, and income tax planning.
Expanding the business as soon as it starts soaring is a good idea for growth, but you need funds for the same. A smart way of generating these funds is to explore the opportunities provided by the government. Besides bank loans, entrepreneurs can opt for grants and schemes offered by the government to grow their entity.
The Department of Trade and Industry has various programmes like the Black Business Supplier Development Programme, South African Micro Finance Apex Fund, Co-operatives Incentive Scheme, and Gender and Women Empowerment Unit. These are helpful for building capabilities and networking to develop quickly.
A positive cash flow is a necessity for the business to stay profitable. Thus, business owners need to follow certain measures that reduce expenses and increase profits. These include avoiding redundant expenses, invoicing instantly, paying debts quickly, claiming small business tax deductions, etc.
Also, they should focus on using cost-effective methods of promotion such as social media marketing, word-of-mouth publicity, referrals, discounts and offers, etc. Selling more to the existing customers is cheaper than acquiring new customers. Thus, they should continue to spend less and earn more.
Conclusion
Financial management is a prerequisite when you are running a small business. As the organisation's leader, you need to make smart financial decisions that help improve the bottom line and reduce expenses.
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