Cash is king. It’s the lifeblood of every business and must be carefully managed to keep the venture afloat. While generating more cash is always a good thing, there’s more to cash flow management than just tending to sales and profits. Money management is an umbrella term for strategies that help a business optimize and maintain its financial health.
Proper money management makes a business more financially conscious and efficient by informing critical cash-related decisions. More importantly, a firm grip on cash management builds business resilience. U.S. business failure statistics show that 82% of small businesses close shop following cash flow problems — problems that would otherwise be avoided by managing funds more closely.
Money management can mean a lot of different things to different entrepreneurs. This is because every enterprise has a unique management style and business model. Here’s a list of seven money management tips that work for any business looking to boost its financial health:
1. Spread out your income risk
When managing cash, you first want to ensure that money keeps flowing into your business at all times. A great way to do this is by diversifying your income. Relying on a single source of revenue can be risky. If something were to tamper with the sole supply chain or market, your business would be left with zero income.
This actually happened recently on a global scale following the COVID-19 pandemic. According to a FED study, about 200,000 establishments shut down permanently during the first year of the pandemic. This was mainly due to severe supply chain and market disruptions.
On the other hand, many small businesses that already had a diverse income network or were agile enough to pivot emerged from the worst of the pandemic shaken but unbroken.
Diversifying your income by leveraging more opportunities, targeting multiple market segments, and broadening your product/service lines not only increases your revenue but also helps secure the business’s future.
2. Optimize your expenditure
Optimizing business expenditures means reducing and structuring expenses to maximize productivity while minimizing cost. In many ways, cost and budget optimization are just as important as increasing turnover, perhaps even more so because they help the business become more efficient.
Your cost optimization strategies should revolve around the following practices:
- Minimize business spending by cutting unnecessary expenses and switching to more pocket-friendly and efficient business processes.
- Prioritize your expenses and investments based on their role in business performance and success.
- Measure the value of your spending with the far more insightful ROI metrics rather than just the costs.
3. Formulate a good billing system
Outstanding invoices are a big financial management pain point for many small businesses, especially those in B2B markets. According to one study, there’s a 63% chance that your invoices will be paid on time (within 30 days). Meanwhile, only 18% of invoices will get paid at all if they’re not paid within the first 90 days. A publication on the WSJ shows that even large companies sometimes struggle to clear their invoices on time.
Overdue and unpaid invoices create gaps in your cash flow and can withhold a considerable sum of your working capital. So, encourage your buyers to make timely payments by implementing tight billing and payment terms.
Or better yet, do away with traditional 30-day invoices altogether. You can try pushing for more cash flow-friendly payment policies such as cash-on-delivery, down payment on credit purchases, and Net-7 terms. If these are not viable options, you can keep the Net-30 arrangement and supplement the cash flow with invoice financing.
4. Separate business and personal finances
Some business owners like to mix their business and personal finances. This is called commingling, and it often seems like a harmless practice. But in reality, commingling makes it difficult to track business financials, particularly when it comes to bookkeeping and taxation. This limits your visibility into the business's performance, essentially blinding your financial planning efforts. Additionally, your personal property can get tangled in the business's legal issues, such as claims and audits.
Using your personal earnings to fund the business or drawing a salary from the business's revenue is not wrong. Just ensure there’s a distinct boundary between your business and personal accounts.
5. Keep the books in order
Bookkeeping simply means logging accurate and timely financial records. Doing so helps you track transactions and gain a clear picture of your business's financial standing over time. Moreover, well-organized financial data is a rich source of vital insights for guiding financial planning and decision-making.
There are numerous digital bookkeeping systems equipped with sophisticated AI features that you can use to draw valuable insights from vast volumes of raw financial data. With such tools, you can easily visualize your cash flow, make accurate financial projections, and discover actionable business performance patterns.
Nowadays, there’s more to bookkeeping than just filing ledgers, reports, and receipts. Thanks to advanced data technologies, bookkeeping is now a unique way to learn from the past, analyze the present, and predict future financial performance.
If you're still relying on manual bookkeeping processes, it’s about time you upgraded from cumbersome spreadsheets and countertop ledgers. Nowadays, there are numerous inexpensive digital tools you can use to automate and simplify bookkeeping — QuickBooks is one great example.
6. Plan ahead
Money management is mostly about being financially organized and preparing for expenses well before they arise. In other words, you want to avoid unpleasant financial surprises that might potentially cripple your operations. For the most part, this means drafting and following a budget. A budget is simply a well-documented spending plan based on the business’s income, obligations, and objectives.
In addition to managing cash, budgeting is an essential part of any business plan. But surprisingly, a 2020 survey found that about half of small businesses did not have an official, formally-documented budget. Don’t be counted among the many entrepreneurs who skip budgeting despite being a vital aspect of financial planning.
7. Don’t be afraid of business loans
There’s some level of fear and stigma around business lending, particularly among SMB owners. But avoiding financing would be denying your business an opportunity to grow. For instance, external funding might come in handy to bridge cash flow gaps and sort out cash emergencies. Business loans can also provide the much-needed cash infusion to seize emerging opportunities and expand your enterprise.
Contrary to some beliefs, loans are not just for needy, struggling, or failing businesses. You can actually take business loans for financial management purposes. External financing can be a convenient solution for budget optimization, liquidating unpaid invoices, facilitating new income streams, and acquiring the tools and resources your business needs to thrive.
The only problem is that accessing financing can be a frustratingly complicated, lengthy, inefficient, and even disappointing process at times. Many SMBs find it challenging to get approved for favorable funding, especially from banks. That's why Lendzero has taken a bold initiative to ensure entrepreneurs can easily and quickly get the funds they need to empower their businesses.
How Lendzero can help
Lendzero matches SMBs and start-ups with dozens of financing offers from multiple lenders, including big and small banks, credit unions, and alternative lenders. The best thing about Lendzero is that you don't have to haggle with lenders because all the offers are negotiated and qualified for your business beforehand. And once you’ve made your pick, Lendzero will assist you with the application and underwriting processes to ensure quick and smooth disbursement.
Register with Lendzero for free and embrace stress-free business financing as part of your money management strategy.