What is money management and why is it necessary to manage money?

What does money management mean?

Money management means that your company has enough funds on the current account to always meet your financial obligations. As a business leader, the most important day-to-day task is managing money. In a small business environment, such as Estonia, where everyone knows everyone, information about your constant debts spreads like wildfire. As a result, you may get sold at higher prices and with shorter payment terms, or if an any credit would be given to your company at all.

For a company to have a good cashflow to conduct its day-to-day business, it is necessary to look after money on a daily basis and do it so religiously. It’s common when a company makes good profit but lacks money to pay its bills. In such cases, cashflow should be reviewed critically and pin down the reasons why such situations arise. Perhaps it would be possible to receive payments from somewhere faster or it be possible to negotiate longer payment terms with some of your suppliers.

Seven ways to better manage your money

1.     Speeding up receiving outstanding invoices

One of the biggest mistakes when managing money is not dealing with uncollected invoices. This often leads to a situation where you are unable to pay your bills because others haven’t paid theirs owed to you. In the worst case, these invoices may never be paid at all and this will cause significant damage to your business and the balance will move in a negative trend, eventually you will run out of it.

Solution: Send reminders to immediately once you see that the customer is late with their payment. One way to do that is to create a sound credit policy and start using the SISIFLOW Cash-Flow Tool, which gives you a quick overview of all outstanding invoices.

2.     The process of paying suppliers’ invoices

While in the case of sales invoices it was very important to monitor the receipt of invoices, in the case of purchase invoices, it is extremely important to negotiate the longest possible payment terms.

Solution: Review Critically all suppliers and where possible, negotiate longer payment terms.

Using the SISIFLOW tool, keep track of your payment deadlines and pay all invoices at the due date, not sooner, not later. Doing so, you can use the money and turn it into profit until the payment deadline. Always paying on time will increase the reputation of your company and therefore gives you an opportunity to ask for longer payment terms in the future.

3.     Preparation and submission of sales invoices

A huge amount of work has been done yet invoices have not been submitted (therefore, the work is yet to be finished).

Solution: Constantly monitor the processes of work delivered and forecast sales – sales invoices have already been prepared. Using the SISIFLOW tool, you can easily track the generation of sales invoices for projected invoices.

4.     False loan and equity structure

It is often possible to significantly improve cash-flows by reviewing existing loan agreements and analyzing the resources used to invest in the company.

Solution: As a rule of thumb, short-term assets should be financed with short-term liabilities and fixed assets with long-term liabilities and equity. If the cash-flow is not sufficient, consider reducing the amount of dividends or the owner should insert additional funds to the company by increasing equity. For existing loans, consider whether it would be smart to consolidate all existing loans and extend the repayment periods.

Using the SISIFLOW tool, you can easily track loan repayments over a long period of time.

5.     Too high fixed costs

Each company should monitor its fixed costs and revaluate their viability on an ongoing basis.

Solution: Review marketing costs and their effectiveness, make the office paperless (or paperless), make work processes more efficient with IT, give employees more opportunities to use the home office if possible, and change the office to a smaller one, and so on. Keep an eye on expenses through budgets.

Create a budget quickly and easily with SISIFLOW and keep track of your revenue and expenses.

6.     Low level of gross profit

Gross profit is the profit that is left after deducting direct costs from sales revenue.

Solution: There are an abundance of strategies how to reduce direct costs, such as increasing work productivity, reducing material waste, better managing labour costs, and so on.

Create a quick budget sheet easily with SISIFLOW and keep track of your revenue and expenses.

7.      Too low sales revenue

If the existing sales revenue is not sufficient to cover fixed costs and other necessary investments, the company has a serious issue.

Solution: If you are a fast-growing start-up-type enterprise, the solution is to add further financing. If this is not possible, the focus should be on increasing sales revenue. This requires investing in marketing and sales, as well as keeping impeccable existing customer relationships, sales growth and manage pricing.

One option is to use the SISIFLOW tool and create a quick and easy budget to keep track of your revenue and cost.

 To conclude

Managing daily finance will help you avoid major liquidity problems and grow your business and generate profits. Start each new period planning a budget and continue to monitor it consistently, you can be sure that your business will thrive you will be able to anticipate potential liquidity problems early. This will enable you to act fast and prevent problems and avoid situations where you will have low funds. Skilful money management gives massive advantage over your competitors.

Should you feel that you could use a specialist consultation to set up a successful money management, please email us to info@sisi.ee and see more inf