Tips to Manage Money

These 12 tips to manage money are for freelance, self-employed, small business owners who want to get better at handling their business money.

If you want to avoid being one of the 50% of businesses that fail in the first five years you must get some basic systems in place early on.

These will help to improve your cash flow and increase your confidence with your money management skills.

Tips to Manage Money

12 tips to manage money for small business

Some of these tips to manage money include links to informative articles by other websites because they add value to the information provided here and are not an advert for using their products or services.

1. Keep personal money separate from business money

I have mentioned this before (see my bookkeeping tips) and I do so again because it will save you a lot of work and a big headache later.

The benefit of having separate accounts means only having to deal with business transactions in your bookkeeping system so you or your bookkeeper are not wasting hours splitting the business transactions out from the personal ones if everything is lumped into one account.

If you have already gone for several months with one personal bank account for everything, that’s fine. Make a plan to contact your bank now (finish reading this page first!) and arrange for another bank account for your business and find out from them what the best type of accounts are for your business, but that's not all....

2. Open two bank accounts for your business money

Tips to Manage Money

At a minimum you should have two bank accounts to keep your money in - a main  account and a savings account.

• The main bank account will be for receiving customer payments and paying your bills or spending on expenses.
• The savings account will be for your taxes.

3. save money for taxes

Set aside a percentage of your earnings into a savings account so that you are covered for paying those important taxes that will come around through the year or at the end of the year. 

At first, transfer about 20-30% of each payment you receive from a customer into the savings account until you are able to find out how to calculate your estimated tax.

The amount of tax you must pay will be based upon your legal business structure (sole proprietor or company).

Do an internet search on the phrase ‘how to estimate business tax’.

Estimating your tax is a good way to help you save appropriately and avoid being stung with a tax bill that you have no way of paying because you haven’t bothered to save.

Don’t think that because you’re in your first year of business and the government hasn’t yet sent you a notice of your tax obligations means it isn’t coming.

Are there any other payment obligations you can save for so that you are not tempted to spend that money if you leave it in your main account?

4. get good at collecting money owed you by customers

Having a good system in place for collecting what’s owed to you by customers is vital for the life of your business.

This of course only applies to you if you allow your customers to have an account with you which they only pay at a date later than the service or goods you provide them. 

The minute a customer is overdue start contacting them.

There are some collection ideas here for that.

Now this may be obvious, but not getting your customer payments in will have an effect on your ability to pay your bills. Is there a different way to combat this? Yes, read on...

5. Get your customers to pay money in advance

Depending on the type of business you have, consider transitioning to a system where your customers must pay you in advance before they receive your goods or service.

It is possible that some potential customers may turn your business down with this pay-in-advance arrangement, but you may be better off without them and the burden of chasing them for their money or taking a huge hit when they never pay. 

Train your customers in the beginning that this is how you work, and then give them the best service ever to retain them. You will find it more rewarding and can garner you your best type of customers this way, as well as a healthy cash flow for your business. 

Invoiceberry.com has some interesting ways to get paid in advance.

6. pay your bills on time: avoid late charges

Aim to pay your bills on time so that you can avoid late payment charges or interest, avoid being pestered by sellers trying to collect money from you, maintain a good reputation and sleep well at night.

Unless your business is simple and only pays a few expenses a month, you should consider setting up a good system for managing your payables to help you track your unpaid bills.

This means keeping all invoices from each vendor in one place and making sure each one is entered into your bookkeeping software. Then moving the paid ones to a different folder.

Use a budget to help you set aside enough money to pay the bills.

7. set up a budget

I personally don’t understand how anybody can live without a budget system to manage their money, personal or business! I look at mine every week.

Look for a budget template system either in an Excel spreadsheet or an App so that you can keep aside enough money to pay your bills.

The best way to budget is to estimate how much money you expect to earn and how much you will need to keep out of those earnings to cover payments for several months in advance. This is called budget and cash flow forecasting. 

In Excel you can search for one of their templates called small business cash flow projection and set it up with your own figures.

Using a Cash Flow projection

In it, you can enter your estimated earnings minus your estimated bills and payments for the future months. 

If you’ve been in business a while already you can use your past financial data, plus the knowledge you have about actual up-coming payments to work out your estimates for the forward months.

You will adjust your estimates as the actual earnings or bills come in on a regular basis, like once a week.

As you plug in all your numbers look at the cash on hand total.

If it goes into the red negatives any time forward and looks like it will stay that way, or at least be that way for several months, take steps now to alleviate or fix it so your business doesn't fail.

Here are some options:

• Get more paying customers
• Reduce expenses
• Inject personal cash
• Sell assets to inject cash
• Speak to your bank account manager to get an arranged overdraft or other helpful options. Keep in mind that an overdraft will increase your debt but can help short term if you know you'll be getting good earnings in the near future to reduce the overdraft.

8. Use a daily cash flow sheet

When money is very tight and you have to daily check what income has been paid into your bank account so that you can pay bills, you can try this spreadsheet in Excel. You will update it daily so that you can keep a very close eye on your money.

9. understand the flow of money on your financial reports

Reports tell you where the money is coming from and where it’s going and they help you make good decisions on how best to manage your business activities to improve your money situation.

The two most important reports are the income statement (also called profit and loss report) and the balance sheet.

Look at these reports in depth at least once a month.

You’ll be doing yourself and your business a huge benefit when you learn how to read these reports.

One important thing to be aware of, which often trips up new business owners, is seeing the profit on their Income Statement and not understanding why that profit amount isn’t in the bank.

The profit amount doesn’t equal money in the bank. I explain it all here. 

10. calculate your debt ratio

A debt ratio tells you if you can turn all your business assets into cash to pay your business bills and debts.  

A debt ratio will help you see if you have enough assets (cash, equipment and accounts receivable) to cover your liabilities (loans, accounts payable, tax payments). 

It’s very easy to calculate quickly. You will use the figures off your balance sheet for this.

The ratio is calculated by dividing total liabilities by total assets.

Low Ratio

Example: Assets $250 / Liabilities $100 = a debt ratio of 40%.

A low ratio percent means you’re fine and can cover your bills.

High Ratio

Example Assets $100 / Liabilities $250 = 200%.

A high ratio percent means you’re not fine and do not have enough to cover your bills and debts.

A current high debt ratio is an indicator that you need to change how things are done in your business to improve your money situation.

11. protect yourself with the right kind of insurance

Get business insurance in place as soon as possible to protect yourself against money problems.

Many small business owners can simply not afford to pay financial claims made against them and it’s very risky not to be insured.

 Depending upon your circumstances you may need to consider:

• liability cover to protect against claims of bodily harm or property damage which occurred in your workplace, or 
• liability cover to protect against errors or omissions when providing a service, or to cover your employees
• property insurance for your buildings and contents  
• a range of other insurances which you can consider depending on what your business does.

Here are some examples: 
USA: Types of Small Business Insurance (Hartford Insurance)
UK: What Type of Business Insurance Do I Need (Simply Business)

12. seek support from a mentor or business network

A business mentor can:

• help you with practical steps and advice to work better in and on your business 
• help you work out how to move it forward and grow
• how to improve your skills to manage money. 

If you get stuck or lack confidence or just have no clue what to do, investigate whether a business mentor would be a good fit for you. 

Examples of mentor services:

USA: Find a mentor with Score
UK: Start out with a business mentor

An alternative is to join a network of businesses like yours on LinkedIn or FaceBook or wherever they hang out so you can get support and ask questions.

One day you will be the one with knowledge and can help newbies.

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