fbpx Skip to main content

There are many businesses that do not go to the level they could just because of financial mismanagement. As entrepreneurs we sometimes focus on just starting and keeping the business, and getting new clients, and forget to watch the numbers. We may also assume just because we are getting clients, it is translating into money.

This article has in fact been motivated by the various discussions we have had in our entrepreneurship programme about management of money and the challenges people face in their respective businesses. Just the same way we might have had to relearn personal financial management principles, we sometimes have to rethink management of money in our companies.

These are some of the lessons discussed that many entrepreneurs have had to learn along the way when it comes to money in a business.

You must have an accountant.

It is very tempting especially in the beginning to try and do this yourself. You want to save money, watch costs and curtail spending on anything that is not directly related to getting a client through the door or money in your pocket.

Keeping books is the last thing startups think about because they first want to have something to keep books for. However just like saving is a habit, financial management and record keeping must also be a habit from the very beginning.

Track Cash Flow

The same way we all know we would have been better off had we started saving from the first salary we earned, you will be better off tracking what goes in and what goes out of your business from the day you start. This does not have to be a full-time position. You can even get someone to come in for a few hours a week until a full- time resource makes sense.

A good accountant in the long run will save you money as you know and have control over your expenses, you will be able to know how much your business needs to make which will give you a sense of direction on business activities and avoid things like tax coming back to bite you.

Separate your personal expenses from business expenses. Anybody who says, “I don’t pay myself” is living in an illusion. There is nothing noble about not paying yourself from your business. Why most people think they don’t pay themselves is because they do not draw a regular income on a particular day i.e. a structured salary.

But most times what people are actually doing is taking money from the business for personal expenses in an informal manner. As long as you are eating, paying for transport or fuelling a car, paying bills, phone expenses and so on, and the money to do all these things is primarily coming from your business, you are paying yourself.

What you need to do is separate the personal from your business.

Pay yourself an amount that goes into your personal bank account.  Let yourself be a cost to the business because you are putting in time and effort. The business funds are not your personal funds and if you treat them like that, the business will never grow.

This separation also helps keep your personal financial management in check. Without this separation, even if your business cash flows improve, your personal spending will interrupt them because you have become used to spending as much as is in the business account.

Curb this detrimental habit in your business by just paying yourself a standard amount.

REVENUE NOT PROFIT

Profit is not cash flow. Great revenue is really nothing to write home about. Just the same way in personal finances, a huge income really means nothing in wealth creation. It’s what you do with the income i.e. the returns you make from the portion you invest that matters.

It is the same thing with your business; revenue is just sales. It’s always good to keep track and grow your sales but the true measure of financial progress is profit. In simple terms profit is what is left over after deducting the expenses including paying yourself. For this reason, it is possible to have a business that has more turnover but less profit than another business that has less turnover.

Profit is what enables you as the business owner to pay yourself more (dividends) and/or to grow the business. At the same time do not also get too comfortable with profit. Over and above profit watch cash flow. It is possible to be profitable but have no money in the bank. This can be due to things like not collecting debt from clients fast enough or efficiently enough.

When you invoice a client it may be recorded as revenue but have you actually received the funds?

Watch how much money actually goes into your business and comes out. You must track this more than anything else. If you have decided to be in business, remember a big chunk of this will be about managing and understanding money. Your business will not actually care that you don’t like math. Watch the numbers and form a relationship with them because in time they will start to tell you a story about your business that no one and nothing else can.

 

One Comment

  • Pickingy says:

    Informative article. It has given me better definition of key concepts involved in business planning. Thank you.