Tips to Manage Your Small Business Finances

Tips to Manage Your Small Business Finances


Optimising financial expenditure in SMEs

When you start a small business many processes need to be established and nurtured to create a stable structure from which the business can grow. Managing the financial health of your small business is crucial to creating this strong foundation. Understanding how to manage your company’s finances is the first step in solidifying the longevity of your business.

Merchant Factors explores a few useful finance tips to help SME’s and small business entrepreneurs manage their small business finances.

1. Properly Manage Small Business Finances

Your business’s finances may look good on paper but, if most of your working capital is tied up in unpaid invoices, you could be putting your business under unnecessary financial strain. This emphasises the importance of keeping on top of your business’s invoices and debtor administration.

Tips to stay on top of business invoices

  • Send out invoices as soon as possible.
  • Set shorter rather than longer payment terms.
  • Always follow up on sent invoices to ensure they have been received.
  • Use technology to automate monthly invoicing.
  • Cross-reference invoice numbers with processed payments to ensure payments are made when due.
  • Charge penalty fees for late payments.
  • Outsource your debtor administration to a third party.

If debtor administration and keeping track of invoices, outgoing payments, and payments due are not your strong point, consider outsourcing this function to the professionals. The benefit of outsourcing the debt administrative aspect of your business is that it not only provides you with peace of mind, but it ensures the finances of your small business are managed effectively.

Cash-flow is king, and these tips will ensure you maintain adequate cash reserves to fund and grow your business.

2. Negotiate Terms with Suppliers

Being with a supplier for a long time is great for relationship purposes but this is not always the case for the business’s bottom line. Consider shopping around and if you find the same thing for cheaper from a different supplier, use this to negotiate contractual terms with your current supplier's

Another tip is to enquire about discounts such as bulk discounts, upfront payment discounts and so on. If you have established a strong relationship with your suppliers, you could also consider paying a smaller monthly retainer amount for services instead of a higher ad hoc fee depending on the services offered.

The key takeaway here is: do not be afraid to negotiate. You will be surprised how far asking will get you.

3. Regularly Review Financial Statements

It is unbelievable how business expenses can quickly add up and start eating away at the business finances. Which is why small business owners must keep track of their finances and review the expenditure regularly.

This means reviewing the following company documents:

  • Profit and loss sheets
  • Balance sheets
  • Accounts receivable reports (debtor’s books)
  • Income statements
  • Manage payroll (Remember to keep the company and your personal expenses separate)

These documents track all the income and expenses of the SME and give the small business owner’s key financial insights they need to make the best decisions about their business’s future, and plan ahead.

Even if you outsource the accounting and debt administrative processes of your small business, it is important to keep an eye and occasionally review the financial statements of your business

4. Create A Business Emergency Fund

An emergency fund is a pool of money that has been created by the business, and contributed to each month, for unforeseen circumstances. By creating a small business cash reserve , the company has something to fall back on in case of a financial emergency or lack of cash flow.

The first step when creating an emergency fund is opening a business account. Next you need to commit to making monthly or regular deposits.

The goal for an emergency fund is to save at least three months’ worth of business revenue to help your business continue operating in a financial pinch such as a pandemic, cash flow issues and so on.

5. Invest in growth

It is important to keep money aside each month with the goal to use this money to fund the expansion of your business down the line. Besides funding growth plans this money can also be used to make the most of unexpected opportunities. However, if your business does not have the money available to create a growth fund, there are alternative ways you can generate the cash you need to fund the growth of your small business.

SME owners can generate capital to fund business growth through:

  • Small Business Loans – While bank loans may still be one of the most popular financing options available, this type of funding is not the most accessible option for small businesses because of the rigid requirements. At the very least a small business will be required to have a clear credit record , well thought out business plan, and a strong motivation letter.
  • Venture Capitalists – Is a form of private equity finance whereby an individual or organisation collects other people’s money in the form of a fund. This fund is then invested in a small business in exchange for receiving a higher return on investment compared to more traditional investment avenues.
  • Angel Investors – Are the opposite of venture capitalists and are usually wealthy individuals who invest their own money in a company in exchange for a portion of the business in the form of shares.
  • Crowdfunding – Also known as crowdsourcing is when a business or individual uses the visibility of the internet to generate multiple small investments, (think economies of scale). In exchange for their investments the individuals are offered an exclusive benefit as a reward – such as early access to the product or a discount.
  • Factoring - Factoring is a finance method where a company sells its receivables at a discount to get cash up-front. The money can then be used to increase production, fund growth or expand other parts of the business.

There are many options SMEs can use to generate the finance they need to grow their business. The key is to select the option that would best benefit the type of business and industry the company operates in.

If you want to explore factoring as an alternative to restrictive bank financing, or are looking to fill the funding gap for your business while you are waiting to finalise a long-term financial agreement, we have solutions for you.

Merchant Factors is an independent specialist factoring company which allows us to:

  • Tailor our facilities to suit any size business and its financial needs.
  • Provide expert, transparent credit control and debtor administration support.
  • Offers some of the shortest turnaround times in the industry from application to pay-out.

For fast, flexible business finance – contact Merchant Factors today

Finance beyond the Numbers.