Why you must understand business money management
Money management is the most important part of any business. Without effective money management the quality of your product has no value; your impeccable customer service counts for nothing; and that wonderful web site might as well not exist. Failure to understand money management can bring the whole thing crashing down around your ears – and does, for half of all new businesses. Here’s how to prevent it happening to you.
When Tom Cruise screamed: “Show me the money” to Cuba Gooding Jnr in the film Jerry Maguire he was unwittingly giving sound business advice to every company.
That’s because if a business loses sight of the money it has lost sight of the reason it exists at all. That might seem to be stating the obvious, yet failure to keep an eye on the money leads to failure of half of all new business in their first couple of years.
Sadly, it’s doesn’t have to be a hard lesson, but it does require more discipline that people embarking on a business startup may be unaware of. Let’s think it through. Say you want to make and sell widgets. Doesn’t matter what they are; it’s a business idea based on the notion that you’re good at making them. Once you’ve been through the proper process of establishing that a market exists for your widgets, you need to think long and hard about the money at the heart of the business; the money that will allow you to make them profitably.
The six Cs that will help you make the most of money management
Costs: You need to understand these inside out. Take the case of the little old lady who was astounded at the price of a portion of Lemon Sole in a high-end fish restaurant. “I can buy it for a tenth of that in a supermarket,” she said. Sure Grandma; but you’re not thinking about all of the costs. Buying Lemon Sole in a supermarket isn’t the same as buying it in a high-end restaurant, where there are chefs and waiting staff salaries as well as utility bills to be paid, cutlery and crockery to be provided and washed, table linen to be laundered, menus to be printed, and business rates to be paid. The would-be widget-maker needs to factor all of those into his or her equation, and to keep them as low as possible.
Cash-flow: This is the ebb and flow of money in any business; what has to go out against what you’re able to bring in. But it’s not just about the numbers; it’s also about the time. Think of it this way: You invest all of your available money into raw materials, make the widgets, sell them at a profit and deliver them, along with the invoice, to your customer. Then you go back to the factory to make more for another client – but you can’t; you have no raw materials. You still have bills to pay, for heating, lighting and the loan on the widget-press you bought on credit. But you can’t make any more widgets until the client settles the invoice and puts cash back into your business. Large firms can make you wait months for payment; it’s neither fair nor just, but it happens. And poor cash-flow kills small businesses. Be sure you can be paid promptly; if you can’t, you must ask yourself if you’re dealing with the wrong client, and look elsewhere.
Call in the experts: If you’re struggling to understand the numbers, call in someone who does. A good accountant is so much more than a reliable number-cruncher these days; they’re an invaluable source of good business advice, and can be an impartial sounding board for your ideas.
Contingency: Call it expecting the unexpected. Build in a sum of money to keep the wolf from the door in the lean times. Perhaps you’re working for only one large company; in that case you should be hearing a warning bell. What happens if they pull the business, and buy cheap Chinese widgets instead? Try to have a financial reserve to protect you against that eventuality – but before you need it, broaden the client base.
Count everything: Overlooking an expense is fatal. Keep doing it, and you’ll find there’s less in the bank at the month end than you think there ought to be. Getting this task right is important; being obsessed about it less so. The best way is to find an efficient way of doing it – but resist the temptation to shortcut. Look for one of the money management apps. So long as you’re diligent in recording your business expenses there could hardly be a more efficient way to do it. Solo Expenses, and its big brother Expense on Demand, contain all of the features your company needs to keep control of expenses. Solo Expenses was the first expense manager app to be designed with the sole trader in mind, and sits happily on your smartphone, in instant readiness to record every expense – as a keyed entry, a photograph of a receipt or as a voice memo. What’s more, it’s free to download from this page (where the benefits are explained in more detail) for personal use (It wasn’t designed for personal use, but it’s versatile enough to take that in its stride as easily as it does small business expense management) Pay just £2.49 a month and you’ll unlock a host of extra features, such as the ability to transmit reports to your accountant, saving him time and you money. All of the features are explained here. Using Solo Expenses with care means that you’ll avoid paying unnecessary tax, and you’ll have more time to get on with making those widgets.
Check back: Just because a cost was competitive last year doesn’t mean it still is. It’s always a good idea to review your spending in some kind of structure; to examine what you’re paying for things that slip under the radar – how much do you pay for electricity, for example? Do you know without checking? We know of one business that believed it was paying a competitive price for energy, only to find, when the figures were checked, that it was paying about 40% more than it needed to. And if that’s not a lesson in sound money management, we don’t know what is.