Managing money in your business is an important key business consideration after all your business needs money to efficiently conduct day to day operations. For a small business, a substantial part of their money is invested in inventory or blocked by debtors.
Did You Know? The Reserve Bank of India, holds a certain percentage of liquid assets for paper currency in circulation. So, If your currency note tears then visit the nearest RBI counter and you can exchange the currency for brand new one.
Overview on Money Management
Money management aims to focus on how you handle all of your finances, from budgeting to investing, to saving and setting goals. With good personal finance management, you'll also learn to control your money so you can achieve your financial goals.
Also Read: Tips to Become a Successful Businessman
Tips for Successful Money Management
There can be end number tips to manage the money in your business. However, In this article, we will understand the most important and scientifically proven ways for money management:
1. Cash Flow Statement
A Cash Flow Statement is one of the most widely used techniques to analyze the cash flows within and outside the entity.
The Statement is divided into 3 major sections:
- Cash Flow from Operating Activities
- Cash Flow from Investing Activities
- Cash Flow from Financing Activities
The Cash Flow Statement shows the inflow and outflow of cash from these three sources. You can analyse the areas where there is efficient cash management and your business is not managing cash efficiently. You will analyze that inventory and debtors are the most ineffective accounts for cash collection.
2. Reduce the Operating Cycle of Your Business
Operating Cycle refers to the period it takes to realize cash from the raw material used in production. It includes the period of material procurement to its realization in cash from the debtor accounts. A shorter operating cycle is always beneficial for a business as it increases the cash flow within the entity. It is also important to note that a shorter operating cycle means more complete operating cycles within a year resulting in more bottom-line profit as the cash can be reinvested again and again to build on profits. To shorten the operating cycle, discover efficient ways of debtor collection.
3. Stick to Cash Budgets
Budgets are yet another tool to establish a benchmark through which the performance of any activity can be measured. It ensures a system of control for any process within the entity. Cash Budgets are no different. They also establish a set limit of cash above, which is considered over-expensed. Cash Budgets ensure that cash is effectively managed within the entity and that expense does not overstress the available cash, which would otherwise be made available for other productive usages.
4. Manage your Debt Obligations
If your business is over-stressed with debt obligations, it is more likely that you will sooner or later run out of cash. Banks have the policy to charge compounded interest rates on most of their loans. So, if you default on your debt obligations, you will likely end up paying more than what you had been required to pay. Thus, Pay your loan installments on time to avoid any extra penalty. This way, you could save money on your business.
5. Cut Costs
Spend time on analytics generated by your ERP system and try to figure out the bottleneck process that is badly affecting other processes and remove them from your entity. Similarly, you can cut costs in your production activities. However, a scientific way to cut down the cost of your business is to understand your customer's journey in the value chain.
For example - when you shop on amazon, you open the app on your device or website and log in to your account. Then, you will search for a particular product you want to buy. Then, add it to your cart, and will make the payment. After that, you track your order and finally receive the product within the expected delivery time.
From the above example, you can identify the value chain of customers as
- Login page
- Amazon app or website
- User Experience
- Payment Merchant
- Logistics
There is the core process of Amazon that concerns the user the most. As a business owner, you should identify these additional activities and try to cut costs in them as they do not provide direct value to the customer.
Also Read: Top Small Business Ideas to Make You a Successful Entrepreneur
6. Time is Money
A resource has a value that a customer is willing to pay. Similarly, Time is a limited resource for any human being on earth. Thus, Invest your important time into the most productive use to make the best of it. Similarly, your business has a limited time to build on an opportunity in the market until and unless others can grab them. Analyze those opportunities and act on them prudently.
7. Avoid Idle Cash Situation
When money is not in use people lose the opportunity to invest in other productive usages. An old saying is that Money makes money and idle cash in your business should be reinvested. If your business is unsure about an expansion plan, Invest the idle cash into the current operations and strengthen it to earn the best returns.
8. Invest in Marketable Securities
Efficient Money management does not mean that you should hold less cash or bank balance than required in day-to-day operations. Similarly, you as a business owner can invest the idle cash which does not need immediate flexible deposits with Scheduled Banks, or invest in government bonds to earn a return on them. When you need cash, withdraw them.
9. Manage Inventory
Inventory is one of the most substantial portions of the investment for manufacturing concerns. Managing inventory could be one of the important steps to managing money in your business. Thus, Establish a robust inventory management system to realize cash from inventory easily.
10. Establish Emergency Fund
Emergency funds are very well required in situations when your business may run out of cash. It does mean that your Company is run out of business. Still, there will be situations when an unexpectedly large amount of expenses will be incurred in your business for which you have no contingency funds. Thus, having an emergency fund will save you from unexpected financial stress.
Also Read: Unique Business Ideas With Low Investments
Conclusion
Money is the biggest asset for your business operations. If you do not re-invest money into your operation, it will badly affect your profitability. Money management revolves around tracking expenses, investing, budgeting, banking and assessing tax liabilities. It can be considered as a strategic method for delivering the highest interest-output value for any amount spent on making money.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.
