Accounting & Finance
The Importance of Money Management in Small Business
Starting a new small business has many challenges, not the least of which is raising sufficient working capital to fund establishment costs, inventory and operational costs to a point where the business is turning profits.
Many new business owners consider that to be the hardest fiscal challenge that they have to face in the early years, but more experienced business consultants often say that money management after establishment of the business is more important.
That’s because with the advent of the FinTech industry, accessing capital for business growth is much easier now than in the past. Gone are the days when the only sources of cash were equity capital or a business loan from the local bank.
These days finance companies like Beyond Merchant Capital and many others offer innovative business loans that can be repaid out of future sales, and don’t require any security like more conventional bank loans.
Many small business consultants say that securing loans or cash advances and financial help is actually the easy part – it is proper money management of the subsequent cashflow that is the key to business success.
Normally, the initial investments in a business will be spent on assets and allocated to daily operations for a specific period. The span of time will vary, reasonable enough to give the company time to generate actual revenue from operations on its own.
How quickly the business can rack up revenue will depend on how effectively a company is able to market its products or services. There will be a steep learning curve for those who haven’t run a business before. Even for more experienced business owners, things may not always go according to plan in the early months of a new business. Regardless of the outcome of the initial marketing efforts, the fact remains that administrative and overhead expenses incurred need to be covered.
A new business won’t grow without effective sales and marketing strategies, but for most small businesses, marketing is not usually allocated the same percentage of the operational expenditure budget as for larger entities.
Therefore the business faces a balancing act between allocating sufficient budget to marketing, but at the same time ensuring that all other essential costs are covered during a period when revenue may be well below breakeven levels.
Fixed and variable costs
For any business, keeping costs at a minimum is easier said than done. There is always the temptation to spend more on marketing and advertising in the hope that this will generate a quick return on the investment, but this strategy often does not work in a competitive business sector.
It is common in the infancy stages of a new business to see proprietors tighten their belts after a few months when it comes to spending, because revenue projections more often than not turn out to be too optimistic.
Costs are normally categorized as fixed and variable. Of the two, savings have to be made from the latter since fixed costs are set and cannot be reduced to compensate for shortfalls in projected revenue.
When variable costs have to be reduced, there is a temptation to cut back on marketing because it is a more discretionary cost than many other variable costs, but this can be a Catch 22 situation with reduced marketing expenditure causing further reductions in revenue growth.
Keeping track of progress
Therefore it is essential that new business owners closely monitor the money coming in and out of the company in the first 6-12 months of the business’ establishment. Proprietors should seek to establish daily, weekly and monthly reporting systems for cashflow so that trends can be analysed before problems occur.
The creation of such reporting systems will provide a bird’s eye view of how the company is performing and how its resources are being utilized. However, understanding these numbers can be tricky, so it’s a good idea to employ the best bookkeeper or accountant that the business can afford.
But relying on a bookkeeper or accountant to provide the business owner with financial advice may not always be sufficient, because predicting longer term trends and forecasts require quite a high level of financial skill and the ability to think strategically.
Work with an accountant
Not all business owners may be good with numbers, or even understand the advice that their bookkeeper or accountant may provide to them. Analysis of the impact that such advice may have on the business can only be effective if the person receiving the advice knows what the numbers mean.
Therefore using an outside financial advisor who has experience with many different types of businesses can be a very worthwhile investment in the early days. The professional fees for such advisors will be much higher than what a business owner would pay his or her own accountant, but the advisor will likely be able to identify future cashflow problems much earlier than the business owner’s own finance staff.
Working with figures can be stressful, particularly for those who have difficulty understanding them. A good financial advisor will be able to explain things in ways that are easy for all business owners to understand, and assist in the decision-making processes that are an important part of money management.