Manage Money
Businesses are considered succesful only if they are financially sustainable. To achieve that, a lot of planning and supervision is required. Without a plan in place, the finances are bound to remain out of control with no clarity on whether a business is progressing or not.
To begin you journey as an entrepreneur, you should start looking to focus on the five areas mentioned above, although there can be more areas or sub-areas as well. But, let’s start with what we can digest initially.
BUDGET is an estimate of income and expenditure for a set period of time and is the most important tool for money management.
Budget planning will force you to think 2 things –
- Where & how are you going to spend and how much
- How are you going to fund your expenses – from income? Equity contribution? Loan? Delaying payments?
You must create a budget for your organization such that it’s easy to understand and flexible enough to accommodate changes.
Budgeting will ensure you manage your funds well and don’t go out of money while running your operations & getting pulled into it. When you get into driving your business, often you would get tempted to take quick and rash decisions which may impact your cashflow. To manage that situation, it’s important to keep on referring to the budgetary goals. All it requires is a simple table on excel and follow that.
GOAL SETTING is connected to budgeting but may require its own focus. For example, you may set budgetary estimates first and then allocate the funds to respective activities. On the other side, you can also prepare goals with their budgetary requirements first and then integrate with overall budget. Whatever the approach, your realistic goals will be influenced by how much money you foresee to have with you in your business and that insight comes from budget.
Goals need to be set and distributed to the different owners anyway. These goals can be about sales, marketing, product or service development, delivery tracking, invoice tracking, skill development, hiring, salary etc. It’s important to have all the areas captured even if your team is small. Once you create the right framework for your organization, it’s easy to expand it. You can refer to balanced score card[i] to understand the way business areas should be organized.
At this moment, just do a high-level goal setting & planning as getting into depth may not be possible.
Do remember to include your own salary also in the goals. Often, founders tend to ignore it assuming they can earn later on but it’s important to note it on paper for notional purpose to check the return on investment at a later stage.
Whatever you earn, you should be able to extract a portion for REINVESTMENT. That’s the good sign about a healthy organization. Typically, 10% is considered to be a good percentage for that. Plan it well and track your income expenses to ensure you reach this goal at the end of your financial year.
Once your budget is set and goals are drafted including reinvestment percentage, next important step is to manage the CASH FLOW in an ongoing manner.
Cash flow is the movement of money in and out of your business connected with income and expenses. We say “connected” because often income is announced at the time of raising the invoice but getting money from the customer may take anywhere from 30 to 90 days.
Usually, for all the organizations, a significant amount is always locked in the market due to delays in payment. This has to be considered while estimating and managing your cashflow. So, cashflow is a record of cash coming in and going out, simply.
Cash flow can be organized into 3 main categories – operating activities, financing activities and investing activities. A positive cashflow will indicate you are able to manage your funds properly and don’t require external funding in between. In case you can foresee monetary requirement using cashflow projections and monitoring, you can raise the short-term loan at the right time saving interests.
And finally, you need to understand the TIME VALUE OF MONEY which means that money at present is worth more than the same sum of money to be received in the future.
Take a simple example of a saving account in a bank. The money you deposit today will an interest over next one year. Say you invest Rs. 1000 and earn 5% interest. After a year, you’ll get Rs. 1050 from the bank. Thus, we can say that Rs. 1050 after a year would be same as Rs. 1000 right now considering the discount rate as 5%.
The time value of money is also referred to as the net present value (NPV) of money.
You must be wondering where is this going to be useful in your business. The answer is business valuation where your future cashflows have to be converted into NPV to arrive at the effective money your business appears to generate right now for an investor. We’ll look into this later on. As of now, understand the concept that money earned tomorrow is less than same money earned today.
[i]https://balancedscorecard.org/bsc-basics-overview/
About Balance Score Cards