Why do businesses fail? The reasons are endless but a recurring problem is a lack of financial know-how combined with lack of education in the running a business successfully.
It is scary to know that more than 60% of businesses fail within the first 3 years in Australia. That is a lot of broken hearts and a lot of broken bank accounts.
Clearly, it takes more than a good idea to create a successful business. At least 3 of Forbes top 10 tips for new businesses are about managing your money. You need to get educated and learn what is involved in the basic money management of your business.
This is your essential guide.
Back to Basics
Keep it simple. You need at least the following:
1. Business Bank Account
If you are just getting started it may be tempting to use your personal account. Do yourself a favour and open a separate business account. This will save you an enormous headache when working out your tax and trying to track down any payments.
2. Get Yourself a Bookkeeper
That does not mean you need to hire or outsource your bookkeeping immediately. Be aware though you need a way to maintain the books or accounts. First, it is very wise to invest in bookkeeping software. The transactions of your business are its lifeblood. You need to have an easy and orderly way of doing that.
Intelligent and well-designed software is the best way to achieve that. You will be able to create invoices and keep track of your payment as well as your money outstanding payments and organise your tax.
At first, if you are very unsure on how to maintain the books, it is smart to hire someone to help. As you become more familiar with the software and process you can take this task on yourself if you wish and have the time for it.
3. Make It Easy to Get Paid
You want to make it as easy as possible for your customers to part with their money. Cash is the simplest and the fastest but that does not make it the best means. In the modern world, people prefer to pay by card.
Make sure your bank account comes with merchant services so you can accept debit and credit card payments and electronic payments. Of course, these services come with a cost so you need to make sure you are selecting a service at a competitive rate. Try not to see these charges as needlessly losing money. Accept it as part of doing business in the modern world.
Better to be paid electronically than not be paid at all. This is especially useful if foreign currency exchange is required.
4. Establish Your Terms and Conditions
You need to set out clearly in writing what your payment terms are. How much they need to pay as a deposit, what they will receive, and when they will receive it, and when you expect payment in full.
Do not put yourself at financial risk. If you need to make upfront payments for goods make sure you reflect this in the client having to pay a deposit. If you are providing a service, make sure you factor in progress payments. So that the risk of not being paid is progressively reduced.
Get with the Lingo
If you travel to another country to do business but cannot speak the local language and they do not speak your language, will your business succeed? Unlikely!
Know your financial terms and what they mean. That way you will be able to understand your business and its financial health and better still, be able to communicate that with others such as the bank.
Here is what you need to know:
1. Total Revenue
This is all the money that is coming into your business in exchange for whatever you have sold or whatever service you have provided. It is also called gross revenue.
2. Business Expenses
These are the costs you have to pay in order to be able to sell your product or provide your service. They include everything. For example, it would include the cost of the product if you are selling something on. It would also include the cost of your premises and all the utilities. It may also include transportation, computer, and IT costs as well as licenses for special software.
Often misunderstood. This is your bottom line. It is the money you have left after you have paid all of your expenses. Don’t forget those expenses should include your salary. Don’t confuse paying your salary as being profitable. It is unwise not to pay yourself a salary.
Some people think they are better investing in the business. Although that has some truth to it, in the long run, it is not sustainable and if things go wrong, you will walk away with nothing. Better to plan a modest salary from the beginning that fairly reflects the work you are putting in.
This is the money you have on hand at any time to be able to draw on pay a bill. This is extremely important. Even if you appear in profit on paper, but you do not have the cash available, it could seriously impair your ability to do business. Get a firm grip on what your cash flow needs are and make sure you maintain it.
A Man with a Plan
You need a financial plan. Do not start your business without one. To do so would be like setting out for sea without a compass or any means of navigation. The outcome is obvious. Get help here from this brilliant e-book on how to attain financial independence with a great financial plan.
Basic Money Management and Your Habits
Here are 4 things you need to burn into your financial DNA so they are never missed:
- Keep your books up to date daily
- Review your costs every week
- Check your progress against your financial plan every week
- Send out your invoices as soon as possible and keep track of payments
Managing your own business is a challenge but it is not impossible. Basic money management is the foundation of good business. Follow this advice and you will get off to a solid start. If you need more help or advice get in touch here.