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How to manage your finances and cashflow

Mon April 11th 2016

How to manage your finances and cashflow

Money management matters

When any new business begins, the first few years are crucial for long-term success, with many challenges and lessons to be learnt from.

There are several causes for a business to fail; however cashflow problems and mismanaged finances are a major contributor. A lot of companies today are failing to plan properly and are either setting their sights far too height or far too low. Failures to keep track of costs or chasing payments are leading factors.

Maximizing your chances for business success means becoming aware of the possible pitfalls. Understanding the pitfalls will allow you to manage your company's finances carefully while keeping a close eye on cashflow.

Taking the sensible steps will help you maintain control on spending, allowing your business to grow without taking excessive financial risks. Here are some useful tips to consider:

Use financial planning and forecasting

It's useful to develop a financial plan or framework to keep track of finances coming into and out of your company. For example, one model for your business might be to spend:

-50 percent of revenue on expenses (such as payroll or supplies).

-30 percent of revenue on building the business (such as expansion of equipment or recruiting costs).

-20 percent of revenue on the future, for developing new products and services.

Different plans work for different businesses, and you should discuss this with your accountant to see what works best for you.

But circumstances change. When they do, your financial plan should change too. Try to conduct some simple forecasting of your business for at least the next six months. Be realistic and try to estimate how much you will sell and how much you will spend. Plug these numbers into your financial plan and see if the results will still work for your business. If not, you may need to change your plan.

Be ambitious but stay realistic

Ambition and enthusiasm are important characteristics of business owners and managers. But so is the ability to make rational financial decisions based on the facts. When you start a new business the feeling of control can be exhilarating. Free from the constraints of employment, you can make any financial decision you want to. Some of those decisions will be good. Others won't.

Like any other area of life, learning to run a business comes through experimentation, successes and occasional mistakes. The mistakes are important – if you read any successful entrepreneur's autobiography or biography, mistakes will feature highly.

But successful entrepreneurs have two things in common – they learn from their mistakes, and they make small enough mistakes that they are able to recover from them financially.

This is a pragmatic approach to doing business. Few large companies became large overnight. They grew over a period of time, with setbacks along the way. Taking the occasional risk is part of good business. Taking unnecessarily big risks is not.

Review expenses regularly

It's important to keep a close eye on your business expenditure. Good accounting software will let you quickly draw up useful reports, such as:

-Profit and loss reports

These show your company's income, expenses and profits over time.

-Balance sheet reports

These show assets, liabilities and net equities.

-Statement of cash flows reports

These show the cash flowing in and out of a business.

-Accounts payable and accounts receivable reports

These show how much money is owed by, and to, your company.

-Depreciation reports

These give you a breakdown of the value of the assets owned by your company.

Keep an eye on your payroll too, even if you outsource some of it. For a growing company, this is often more complex than anticipated

Review all of these regularly, preferably with the help of your accountant or financial advisor, who can act as a sounding board.

Remember to keep your personal and professional finances separate: use a separate credit card and bank account for business-related expenses. That makes it much easier to keep track of your company's costs and also identify business tax write-offs.

At Norton Chartered Accountants, we are one of Auckland's leading accounting firms who can help you manage company finances.