Finances are a key part of running a business and as such, they must be managed efficiently. Here are some tips on how to effectively manage your finances as an entrepreneur:
1. Work with budgets
As an entrepreneur, always prepare your annual and project budgets and stick to them as much as possible. In case you have employees, involve them in this process so that they feel part of the decision-making and thus own the budget. Remember to include the profit you are targeting to make and a reserve provision for rainy days in the budget. Keep on re-evaluating and reviewing your budgets to check if you are on track or need to put in mitigation measures.
2. Project accounting
It’s very important to account for each project separately so that you can know the profitability of every project and whether some projects are subsidizing others. In case you do not have projects, then use your products as projects. As stated above, each project should have a budget and a targeted profit margin. To help you in funding the projects, ask the client to pay in milestones and where possible ask for a deposit before the implementation of the project. After every project, review all the activities performed, money spent, and profits made. The review is very important as it gives you insights into what went well, what needs to be improved on and what didn’t go well. This will inform your next projects and minimize the likelihood of repetition of mistakes.
3. Maintain accurate and updated financial records
It’s not a surprise to find a business owner who has no idea how much his business makes and how much he spends to deliver either or both his/her products and services. A simple accounting system can help an entrepreneur keep track of their finances and make better financial decisions. Financial records also help when applying for credit from financial institutions and filing tax returns to ensure your business is compliant with the relevant laws and regulations.
4. Review internal and external stakeholders
Examples of stakeholders are employees and suppliers. Sometimes, businesses continue engaging suppliers even though there is no value for money. Reviewing suppliers and making the decision that you no longer need them either because there is no value for money, or you have an employee that can handle the role/s internally, is often necessary. But you might not realize this is what your business needs if you do not review your stakeholders. Sometimes employees become redundant, and you must make the hard decision of letting them go. These things are all necessary for the financial health of your business.
5. Have a cash reserve
A cash reserve is an emergency fund that you can easily access and use during lean times. Get it right from the beginning by budgeting for it. It can be impossible to create a cash reserve in a month’s time, therefore an entrepreneur can consider having a monthly savings plan which is informed by your revenue and cash flows. It’s advisable to have three to six months of cash reserves for all operational costs.
