A constant cash flow is key to business success. Whether you are starting up or scaling up, you must have an adequate supply of money to hit the ground running. Many businesses fail within the first five years of operations due to meagre working capital. Experts enjoin that entrepreneurs must have a solid financial plan for categorical expenses to avoid running out of cash unexpectedly.

Before creating a functional plan, you must understand the three aspects of financial management: cash flow, budgeting and financial planning:

Money management strategies for your business

Here are the money management strategies that could help you keep your business running even when cash is tight.

• Pay yourself a salary

Even if your business does not have a separate legal entity, you should compensate yourself for your hard work. The salary that you would offer yourself should be sufficient to pay for your personal expenses. Most startups struggle with poor cash flow as they do not separate personal expenses from business ones.

How much would you pay yourself?

Instead of choosing a random figure for your salary, you should consider the following factors so you do neither overpay nor underpay.

• Look at industry trends. Do some online research to know how much other entrepreneurs are getting for a similar role.
• Estimate your living expenses. If you believe in a frugal lifestyle, your salary package will obviously be less than that of someone with a prodigal lifestyle.
• Plan for taxes as well.

Your salary should rise proportionately to your business profits. If you have noticed 5% growth in your business, you can increase your pay by 5%, and vice versa. This is a great way to balance out between your business and personal expenses.

• Monitor your financial position regularly

As your business grows, you might lose track of your financial situation. It is vital to regularly review your profit and loss statement. Increasing profits cannot always guarantee stronger cash flows. You should make a record of how much cash is coming in and how much is going out.

Software can help you keep an eye on cash inflow and outflow. As long as there is a scope for reducing your expenses, you should take effective measures. If you are already struggling with a healthy cash flow, find out the root cause.

• It is likely that accounts payable become due before your accounts receivable. If that is the case, reduce the billing cycle. An ideal billing cycle is 15 days.
• Another important aspect to focus on is loans. Debt payments also take a toll on cash flow. Make sure that you are not excessively relying on bad credit business loans with guaranteed approval.
• Consider dipping into earmarked cash, and if your business savings are not sufficient, make sure you do not borrow more than you need.
• Look over your payroll expenses, too. Revise salary packages for your employees. Use performance appraisal rather than regular bonuses. If possible, allow your employees to work from home. This will reduce your energy bills, rent and the like.

Be in touch with your accountant to gain accurate insight into your financial condition.

• Choose the right funding

No matter how profitable your business is, you will still need some money to meet your business operations. It is not that you do not have sufficient cash, but making the right payments can disrupt the cash flow. Therefore, it makes sense to spread the cost. Here comes the role of business loans.

There are a variety of business loans that you can consider to support the operations of your business. When using loans, you should identify your business needs. Business loans are a popular option as they are not subject to collateral, but you should carefully review the repayment length.

Consider other options as well. For instance, you can use a business credit card or a line of credit. They may be more favourable funding options than business loans. If you are unable to come down on one side of the fence or the other, talk to a business loan broker.

• Build a business credit score

Your business credit score will not directly influence your financial position, but it cannot be overlooked. This is because lenders take into account your business credit rating to determine the interest rates to be charged. Of course, you will be charged higher interest rates when your credit rating is abysmal. This increases the size of monthly instalments, and as a result, your cash flow gets affected.

If your business does not have a credit score, your personal credit rating will come into play. Bear in mind that a business credit score is maintained separately when your business has a separate legal entity. Otherwise, lenders will peruse your personal credit report.

In order to avail yourself of lower interest rates, you should have a decent credit report. Here is how you can boost your credit score:

• Pay off your bill on time.
• Borrow money only when it is urgent.
• Avoid borrowing more than you need, even though you can easily afford payments.
• Use a business credit card and pay off the balance in one fell swoop every month.
• Focus on a credit utilisation ratio. This should be less than 30%.

While a debt-to-income ratio does not impact your credit score, it plays a big role in influencing the lending decision of a lender. Therefore, you should keep it under 35%. The lower the better.

The final word

Money management is crucial to ensure business growth. With a spending plan, you can easily allocate funds to different aspects of a business. Consider using software to keep a close eye on money going out. When you have an accurate record of cash inflows and outflows, you can better manage your business finances.