Financial Management skill is one of the skills every entrepreneur must learn how to develop. Raising capital is one thing; ability to manage it is a different issue. Financial management requires discipline and skills. No matter the size of any business, lack of financial management skill will lead to the failure of such business. Some are still yet to recover from the aftermath of the collapse of some banks in Nigeria. One might be wondering why banks with a network of several branches, great buildings and large customer base could collapse. The fall of some of these banks was traceable to poor financial management.
Financial management is very broad but it is better to begin with the basics. In managing your finance, here are the baby steps you need to take. I call them financial management rules.
Open Bank Account
Having completed your business registration, you should open bank account in the business name, preferably current account or similar account that will allow you to receive and pay cheques. If you have two or more partners, it is possible you will have more than one signatory to the account. In such case, the authority limit of each partner has to be clearly spelt out. All financial transactions relating to your business has to pass through the bank account. It is possible there will be some times that your customers will pay you cash, you should not be tempted to spend the cash. The cash must be lodged into the account you have opened for your business. Any cash needed for the running of the business should come as withdrawals from the account. It is always better to have a fixed amount as imprest for office use. The amount of the imprest will be determined by the volume of cash transactions you carry out in a week. The amount disbursed from the imprest will be reimbursed as soon as it gets to a certain minimum balance. Now that the business environment is going cashless, cash disbursement should be reduced to the minimum. You can also take advantage of ATM Card and online banking in order to allow flexibility in your operations. Adequate controls should be put in place to ensure the security of your funds. Your cheque book should be kept in a safe. You can also instruct the bank that all cheque payments have to be confirmed by you or any of the partners before the beneficiary is finally paid. ATM Card, PIN and your passwords for online banking should be well safeguarded. It is likely that the bank will send you SMS alerts for every transaction in the account, however it is advisable to request for bank statement at every month end so that you can review your transactions. If you operate online banking, you can access your account via the internet and print out your bank statement at will. Online banking allows you to transfer funds and make payments to third party at the comfort of your office or home. If you are not in the office, it won’t mean that all business transactions will be stalled.
Conducting your financial transactions through the bank account enables you to see all your business inflows and outflows. If you want to apply for bank loan or you want to travel outside the country, you can easily request for your bank statement as banks or embassies usually request for it.
Separate personal expenses from business expenses
Many small businesses collapse because of lack of discipline on the part of the owners. They see the business as their own and therefore, think they can spend the money meant for the business at will whether on business or personal matters.
It is understood that when you are starting your business, there is likelihood that the business will be your only means of livelihood. This means that money for your personal and family upkeep will come from the business. If this is the case, the best way to handle this situation is to put yourself on salary. You are basically an employee in your own business. You look at the revenue coming to the business and ensure that it will be able to sustain the salary. If your cash flow is not healthy enough to support the payment of the salary, you can accrue for it so that you can be paid later. Your salary now becomes part of the business expenses. This type of discipline will even help you attract investors or lenders if you need additional funds for the business.
Track of all income and expenses
Money is like a bird; it can develop wings and fly away. Business transactions involve income and expenses. You should be able to track all your income and your disbursements. If you don’t track your expenses, you may not be able to pinpoint on exact thing you spend your money on. When you track your expenses, you will be able to carry out periodic review to determine their reasonability. You will be able to measure your income against expenses in order to determine the profitability of the business.
Entrepreneurs are frugal. You should use your cash judiciously. Don’t invest too much in fixed costs. Try as much as possible to make most of your overheads variable. The problem with fixed costs is that, they have to be incurred whether your business makes money or not. Example is rent or payment of staff salaries.
Lay a Good Foundation
Putting things in order should be your watchword right from the beginning of your business. One area you cannot afford to mess up is bookkeeping and accounting. Don’t allow your books to be muddled up before you see a reason for proper bookkeeping. It is easier and less costly to set up your books of accounts when your transactions are few and still fresh. If you cannot do this yourself, it is advisable you get capable hand to handle this for you. You may not even need to employ a full time employee to handle this; you can outsource the bookkeeping to a reputable firm that specializes in this area. They know how to tailor their services to suit you and their fees are affordable. This is part of what we do in case you need our assistance.