3 Tips To Manage Your Money During The Tight Months
Whether you’re starting out, or have suddenly hit a rough patch after years of being open for business, learning how to manage your money is a difficult and often frustrating task. Unfortunately, some of us never truly master this skill, but if you wish to keep the doors of your business open, it’s important to develop your money management skills.
Getting to the Heart of Money Management
Two important factors that influence your ability to get a handle on your money are profit and cash flow. Controlling your direct and indirect costs can maximise your overall profit. Creating positive cash flows by timing your payments to occur when they are the most advantageous to you is also important.
Doing so makes it easier to build cash reserve so that you can protect yourself against the very real possibility that you will run out of money at some point in the future. It will also ensure that you have adequate working capital to open and run your business.
What is a Cash Reserve and Why Do You Need One
A cash reserve is simply a portion of your earnings that you save rather than spend. Having a cash reserve, or cushion, makes it easier to weather difficulties that might occur later, such as a sudden slowdown in sales or an unexpected expense. A cash reserve also comes in handy if you want to expand your current business or start a new one in a completely different line.
Ideally, you will take steps to maximise your working capital and build a cash reserve, or cushion, while you are experiencing high sales and low costs. Similar to your personal finances, the business choices that you will need to make when you are cutting back to save are easier when you aren’t facing a shortfall.
3 Strategies to Better Manage Your Money During Tough Times
Sometimes circumstances make it nearly impossible to save, even when your sales are booming. If you’ve hit a bump in the road, or just want to boost your ability to build a financial cushion, the following three ways can help you manage your money more effectively and put you back on the road to financial stability and prosperity.
Pay bills on time, but not before they are due. The payment terms offered by vendors vary, but many offer terms such as 15/30/45/60 days to pay. You might want to pay closer to the last day of the term if your sales are slow, or if you’ve got a sudden expense to cover. One thing to keep in mind, however, is that many of these same vendors offer a discount of 5 to 15% of the total bill if you pay early, so don’t neglect an opportunity to save money and build your relationship with your vendor.
Operate on a cash basis. As a business there are two ways that you can accept payment for your products and services, on a cash basis or a credit basis. With a cash basis, you receive payment up front at the time of delivery. If you operate on a credit basis, you wait for your customer to pay you later, typically, 15 to 90 days after delivery.
If you are running short of funds, or just need extra time to pay your bills to ensure you have sufficient working capital, you will want to encourage your clients to pay you up front with a cash payment, even if you need to offer a small discount for them to do so.
Keep in mind that when you operate on a cash basis, this doesn’t necessarily mean that you will receive payment on the spot in the form of physical dollars. If your customer pays with a credit card, or check, you will need to wait for the processor to deposit the funds from the credit card transactions, minus any merchant fees, into your account.
You should also wait an appropriate amount of time for checks to clear after they have been deposited before you draw on the funds. You should take these factors into consideration when you prepare your budget based on your projected cash flow as well as when you make decisions about when during the term to pay your vendors and creditors.
Get Your “Ducks in a Row” ahead of time. While many small businesses try to avoid debt at all costs, taking some steps to have a line of credit waiting in the wings in case you need it can be a good idea to help ensure that you will have the capital that you need to take advantage of sudden expenses or even unexpected opportunities to expand the reach or lower the long term costs associated with running your business.
Lenders are more likely to grant requests for credit if they see that an applicant has both a good repayment history as well as a dependable means for repayment, which is why it’s a good idea to go ahead and apply for a line of credit before you need one.
Learning to manage your money doesn’t come second nature to most of us. We’re here to help you if you need assistance getting a better handle on your money. In addition to bookkeeping services, we can help you have a better understanding of where your money is both coming from as well as where it’s going. We can also assist you in creating a plan to help your business both survive and thrive. Why not get in touch today and find out more about the steps you can take to create a firm financial foundation for your business?