Does handling of money in your business result in sleepless nights? Yes, it can be tricky but it is just one of those things we have to learn to deal with. Money is important and a business needs to make money. We all want to make the money but sometimes we would rather just ignore the processes that help us make that money or at least figure out how to make it. Here are a few things to put you on the right track in managing money in your business.
- Separate your personal money from your business money.
This is a key reason why many businesses do not grow. To get this right we first have to mentally separate. It’s like your relationship with your child. You feel very connected to your child, you take care of him/her yet you are aware that your child is a separate individual. You are not your business and your business is not you. In fact you are considered as two separate legal entities if you have registered a company. When your business makes money it does not necessarily mean that you have made money. (Click to Tweet this thought) If your business sells goods worth Kshs 100, 000 it does not mean you have personally made that money. Those funds will be used to pay for various business expenses such as raw materials, transport, rent, salaries etc. Businesses expenses are always the priority and not you. In other words your personal rent is not a business priority. However because you do use your time and skills for this business, you should be amongst those business expenses i.e. you should pay yourself. Then from what the business pays you, you can then pay your personal rent. Many of us claim we do not or cannot pay ourselves but we are taking money from the business for personal reasons in an ad hoc manner. We use the MPESA payments for our direct expenses. Walk around with the company cheque book and/or withdraw from the bank account as need arises. Simply pay yourself a standard amount as an expense to the company. On the practical side it obviously means that you have a separate account from the business and you do not walk around with the company cheque book or MPESA receipts.
- Have a reserve fund for the business.
This may not happen immediately but in time the business does not have to spend or pay out all the money received. It really helps to have reserve money. This is similar to what an emergency fund is to you in your personal finances. You can use this for actual business emergencies or to take advantage of certain opportunities that may come your way. This buffer helps because sometimes there could be a temporary situation that could affect sales of your goods or services. You will be able to rely on that buffer to sustain the business instead of taking drastic measures just for a short period of time. There are some businesses that have rushed to cut down on staff only to realise they need to rehire three months later. Alternatively it could be an opportunity that comes along and you need to have cash ready on hand to capitalise on it. Since we spoke about separating personal money from business money, also have an emergency fund for your own needs so that you do not raid the company account. From what the business pays you, save and set up for a rainy day.
- Keep financial records well.
No matter how big or small your business is you must record everything that goes in and out. (Click to Tweet this thought) Even if you started yesterday or the business is still a side hustle, do it. Many people run business from a bank account perspective rather than financial records. As one person told me, as long as they see money in the account they know they gave money to spend. However they have no concept of how much money the business makes or looses in a given period. When you know how much the business has made in a month and you know how much it has spent, you will obviously know whether you are making a profit and if it makes financial sense to keep doing it. You will also know how much you need to sell (goods and services) to be and stay profitable. You will know when it is time to cut down on expenditure. You will be able to plan for the future and allocate resources based on that. You will be able to access credit and raise investments based on proper financial records. You will also be able to tell how much money you need to grow. You will be able to tell whether you are pricing your products properly. Financial records also help ensure that you are tax compliant at all times.
- Remember Cash is king.
Match your payments to receipts. There are some big names out there that are having these issues but at a multi million shilling level. Remember at the end of the day you can boast about your revenues and even your profit. But the tangible reality is cash flow. As an SME it is extremely important you manage cash flow. If you pay faster than you receive money, you might look profitable on the books, but you will not have cash to run the business. As you build your relationship with suppliers, try and get then to allow yourself to pay as you receive money. Alternatively where you can, secure deposits from clients to cover any cash outlays you need upfront. You can also try and get credit facilities like overdrafts from banks and factor it into your pricing. Whatever methodology you use, watch that cash flow and be wary of the imbalance between receiving money and paying out money.
- Last but not least, watch those expenses.
Just like in our personal lives, the temptation is to spend more money as we make more. Resist this temptation as much as you can. I’m not advocating for stinginess but many businesses have found themselves in problems because of expenses that have gone out of control. Let business spending be about growth and not just because there is money in the account.
To learn more about how to use your money as a tool to reach the heights and goals that you had only imagined, click here to learn more about the Centonomy Personal Finance program, Centonomy 101! Ready to register? Click here!
Waceke Nduati-Omanga runs programs on Personal Finance Management, Entrepreneurship and Career Success.