EXPERT TIPS AND GUIDES

Experts never lose interest in trying to sum up the reasons why start up businesses fail. The truth is there are many reasons, but right up there among the most common causes has to be a failure to manage finances effectively. 

Get this aspect of running your business wrong and you will get into trouble, guaranteed!  No matter how great your core business idea is or how well you manage the rest of the enterprise, financial management problems can still bring down your business.  

So, here are 12 golden rules to help manage business finances effectively. 

Many of the rules boil down to careful management of cash flow.  Sales are great, but they don't count until the cash is in the bank. Failing to get on top of cash flow can lead to severe difficulties, even disaster, however well sales are going. So…. 

1. Keep your eye on cash rather than just sales. Focus on the lag between a sale and getting money in the bank and plan for it as well as try and work out ways to speed it up.  Remember, it may take several weeks to make an initial sale, but several weeks more to actually receive payment. 
2. It's important to try and have several revenue streams. Whatever business you're in, being reliant and solely focused on one sale, one contract or one revenue stream, can leave your business too exposed to unexpected events - like late or even non-payments. Diversity can solve this problem. 
3. Keep your books in excellent order. You don't need to be a book- keeping expert, but you do need to keep clear and accurate records - not only because this is a legal requirement, but also because it assists in business planning and can save you a huge amount of time further down the line.  There's no great secret, just record all financial transactions in a way that can be easily understood and keep bank statements in order and cross check them with your own records. A simple spread sheet, plus a back up copy usually does the job. The golden rule is 'Do not neglect to do the paper work'. Letting it pile up is a recipe for confusion. If your business needs are complex, using a good software program will make all this much simpler.  
4. Understand everything.  Don't bury your head in the sand and ignore anything financial that isn't clear or doesn't add up  - it may well come back and bite you at a later date. If something doesn't make sense or is baffling, get to the bottom of it; use all means to understand it. The tools are nearly always at hand - ask your accountant, look on the internet. 
5. Don't settle bills early unless it means a discount. Equally, make sure you keep a good payment record and sound credit rating by never settling them late. 
6. Watch out for excess cash that's just left sitting in your bank account. It's not working to drive your business forward. Know what the minimum amount your bank requires - if any - and leave no more. Use the money for a more useful purpose; put it to work. 
7. Manage your inventory as efficiently as possible. Inventory is simply cash - or potential cash - when it's turned into sales. Yet, if it's sitting on a shelf, like excess cash in the bank, it's not working for you. The more accurately you can manage the inventory needs of your business, the more efficiently you can manage the business's finances.  
8. Allow for tax. Whatever else you can cut, save on and delay payment on, this is an area that doesn't allow for compromise. Know ahead of time what your tax liability is likely to be as sales are made and revenue comes in. Budget for it. This way you can avoid nasty surprises. 
9. Have a really rigid policy on accounts receivable. This is especially important if your business involves entails large up-front costs for inventory or machinery. Don't assume settlement will be made, even if your current cash flow is healthy, because it can quite rapidly turn around. Remember, it's not an asset until it's cash in the bank. Follow up immediately on invoices that are late being paid and perhaps refuse to deliver more orders until older ones are settled - effectively withdrawing credit. If you receive cheques, don't delay - get them into your account immediately. 
10. Have a reserve fund of cash, especially at the beginning of the business's life. You may take a long time to reach profit, an unexpectedly long time, in which case you'll need cash to keep the business - and yourself - afloat. 
11. If you're using a loan to get your business off the ground, ensure you maintain a good credit rating by prioritising repayments and always making them on time. Your business may well need to rely on this sound credit rating in the future. 
12. Regularly review all financial matters relating to your business and especially carry out an inspection to see if there are hidden pockets of cash - areas where you can make savings, or speed up payments. Even small savings can make a big difference to your bottom line when accumulated over time.