The key word here is 'managing'.
Every cent that flows into your business needs to be put to good use, and the results need to be monitored. For example, if you are going to spend money on advertising in the local paper, you need to make sure the value you get (whether it be better reputation or increased sales) is worth the cost. Your aim is to increase assets and sustain cash flow. To achieve the best results possible, you must take an active interest in how well your money is working for you.
Managing business finances is about taking control of your money and utilising it effectively. There are many ways to do business, borrow money, receive money and spend it. Effective financial management is about researching all the options, looking at the impact of each, and selecting the one that provides the most value for your particular business and it's future.
Our Financial Management Course aims to develop an improved capacity to achieve effective financial management for both the business and the individual.
Click here for course details.
A business system provides the backbone for how a business will operate and includes the successful coordination of quality management, innovation management, information technology and control. A business relies on these elements to operate efficiently and effectively.
Business systems can be a key in the success of your business. We are now going to look at a few business systems.
Quality management is the design and maintenance of a compliance system (mentioned earlier) and the responsibility for maintaining it. Quality management also involves managing a business for continuous improvement, based on strong ideals or the mission of the business, objectives and constant review of the organisation. It also looks at the quality of the output of products or services from the organisation.
Businesses that implement a total quality management system, even a basic one, will have a greater control over their procedures and hopefully reduce risk.
The concept essentially involves:
- Writing down the procedures which are followed when doing various work tasks - eg. step by step how you milk a cow, harvest vegetables, or process accounts.
- Developing a procedure to review, and make changes or corrections in response to either a procedure not being followed, or a procedure not working properly.
Many larger organisations (companies or government authorities) have introduced policies which require all of their suppliers to practice a "quality system". In practical terms, this might disadvantage a business with some potential buyers, for example farmers, who might not have that quality system certification.
Manage the Money
Don’t over extend finances. Only do what you can afford, and always keep some money in reserve.
Businesses should be tailored to the financial capacity of the owner. Many owners make a fatal mistake of leaving no margin for error in their planning. You should always hold something in reserve; if not cash, at least the ability to borrow against some tangible resource (eg. a house).
It is one thing to develop a business plan that requires $100,000 to get started, based on a projection that you will be generating a sustainable income before the $100,000 runs out. In reality though, many businesses encounter unexpected expenses, or delays in start up; and would be far better to be developing a business plan that requires $70,000 to get started, with an expectation of the business generating a sustainable income before the $70,000 runs out (and keeping $30,000 in the bank on fixed deposit as a contingency fund for use in only the most extreme situation).
Keep the Cash Flowing
We have just talked about discount vouchers and special offers. These can mean that your profit is reduced, but it can also mean that cash continues to come into the company. Sometimes you may have to cut your losses. If you can sell your 10,000 bottles of shampoo and only make a penny profit on each one, you have still made some profit. If they sit in your storage facility, you make nothing. Sometimes you may have to reduce prices to sell products. Sometimes you may have to cut the price of the service you offer.
Say you are a business consultant who usually charges a large fee per day to advise clients. If the economic climate is bad and businesses cannot afford your services, it may be that you have to reduce your fee or perhaps offer shorter sessions. Instead of a large fee for one day of your services, you could charge for half days or hourly rates and so on. This may not be ideal for you, but it is better to get paid for one hours work a day than nothing at all.
In the long run, or even in the short term, any business has to make money to stay afloat. Keeping money flowing in the short term can help a business survive until things improve. Also, you should see it potentially as an investment. That person who has come to you and bought the cheap shampoo may come to you again. That person who you offer an hour’s consultancy to may become a successful business person themselves and recommend you to other businesses or use your services more in the future.
Make sure you also price products suitably. Profit is not just the gap between the cost of the product and how much you sell it for. There are also other costs that you need to take into account – staffing costs, delivery costs, storage costs, transport costs, accountancy costs, tax and so on. They should all be figured into the amount you charge. It is always best to overestimate expenses and underestimate revenue.