Turning your business into a success story requires you to manage the overall financial management of the company. Poor money management can carry long lasting effects, which may result in the business closing, huge financial losses and crippling debt.
Entrepreneur and Executive Coach, Refilwe Khumalo, says it’s important to avoid falling into the traps that new entrepreneurs do when it comes to money management. Any of the following signs indicate that your business could be in financial trouble:
Not having an effective budgeting strategy
Some entrepreneurs make the mistake of merely listing projected revenues and expenses and then managing these to realise profits. An effective budgeting strategy is recommended to help you thoroughly break down the numbers. It offers you ongoing financial information, insight and data that will enable you to quickly spot any financial red flags, respond to excessive business costs and implement the best financial practices for maximising your profit.
Not monitoring your cash flow
Ensure that you make use of a cash flow statement to help you track the inflow of revenue and outflow of expenses within a specific time period. This will allow you to plan ahead for any periods when you will have more money going out than coming in.
Low cash flow
If you find yourself struggling to pay your bills on time due to lack of cash, this is a sign you could be heading for trouble in the near future. In order to tackle this challenge, commit to working on building an account balance that is equivalent to at least two months of your operating expenses, which will allow you to cover unforeseen expenses and you will have a reserve in place to help protect your business from bleeding financially.
Not managing slow paying customers
New entrepreneurs tend to shy away from being proactive in following up on payments from clients due to the fear that they may chase the client away. Following up on unpaid invoices, however, is extremely critical to managing your cash flow and requires tact. Try scheduling client payment reminders, collection calls, setting clear late payment penalties or collection policies.
A drop in year-on-year growth
This often occurs as a result of not reinvesting profits back into the business. To grow your business and increase profits year-on-year, you need to consolidate your existing performance, increase your market share, diversify, or enter into profitable partnerships or collaborations, joint ventures, mergers or acquisitions.
Having too much debt
Continuously borrowing money to keep the business in operation or to finance new activities is another indicator that you may be nearing trouble. Debt can overburden your company making it difficult to meet business obligations and poses a risk of bankruptcy. To manage this minimise your debt and your expense, prioritise payments of secured loans on your income generating assets and develop debt reduction strategies such as selling your surplus to generate extra cash to pay off debt.
Slow inventory turnover
This occurs when your product lifespan nears its end and moving your product off the shelf becomes harder. To tackle this challenge optimise your inventory turnover by ascertaining if you can adjust your inventory purchasing habit or find suppliers that allow you to resell your unsold stock back to them.
Khumalo adds that cash flow can be your greatest challenge when it comes to the financial wellness of your business. “It’s also important that you stay true to your business vision, conscious of managing unnecessary spending, aware of any potential red flags, are committed to tightly managing invoice payments and are relentless in building a reserve. If you do these things you will be well on your way to building long-term business success.”