Cash is to business what blood is to the body. Most businesses will die if there is no cash flow. Though most businesses start small but it is their aspiration to grow from small to medium and then large companies.
Experts say for any business to grow well, it must imbibe necessary/financial habits. A senior Economist with SPM Professionals, Mr Paul Alaje stated habits that small businesses must have as:
Budgeting:
“For me, the most important one is budgeting. A budget is simply an expectation for business results. Make a budget on the first day of the month to estimate how much income you will receive that month and how much you will pay out in expenses. Then review the budget compared to actual results at the end of the month. And in budgeting, you should ensure that you have a budget that enables you to always have cash flow. What kills businesses is absence of cash flow. You should always budget for more than enough running cost.”
Savings:
Also, you should keep certain percentage of all revenue that comes in as savings. For some it is 5% and for some it is 10%. An amount they will not touch anytime soon. Keeping 10 to 20% will enable you to know if your business is fit at all.
Reduce cost :
Operate at a point higher than average variable cost. If you cannot operate at a higher variable cost, suddenly the business will die or collapse.
Small businesses should programme their business in such a way that the cost window is not more than 33%. You take on debt in the short-term to enable longer-term health and growth for your business. However, unnecessary debt is a drain on your business. And more importantly, once you have business debt, it’s important to make consistent payments, and proactively reduce the principal amount.
Hence you should cut down on how many people you employ, and other running cost. When costs is reduced, you can renew your rent the following year and pay salaries conveniently.
Not all revenue is profit
Every money that comes in as revenue is not profit. Don’t assume that everything that comes into the business is profit. Neglecting this, can cause problems for your business. Declare profit only after paying off debts, all you are owing including your workers, and then pay yourself. So, pay yourself a salary. When you put yourself on salary, you pay yourself every other day you are paying other employee. When you can do all of these and more, then you are on your way to building a successful business.
Establish an optimal business structure
Common business structures are sole proprietorships, partnerships and corporations. Each structure has different legal and tax implication. If you’re not sure which structure is best for your business, you may want to seek professional advice because of the expense involved in changing and maintaining a business structure.
