Entrepreneurs: 3 Ways To Better Manage Your Money

It takes courage to start a new business. While your initial mission may be to make money, a point will come when you'll have to change tactics. You'll have to switch from offense to defense. If offense is making money, then defense is money management. As your business matures, getting good at money management will begin to top your list.

Here, then, are 3 tips to help you get better at defense so that you win the money game:

One, learn how to handle negative cash flow.

Cash is what you have in your register; cash flow is the movement of money in and out of your business. If your revenue exceeds your expenses, then you have positive cash flow. If expenses exceed revenue, then you have negative cash flow. This is a dangerous situation, and if you don’t take care of it, you could be out of business.

Ironically, you could be doing everything right but still run into negative cash flow.

Here's an imaginary scenario to show how this can happen...

A Negative Cash Flow Scenario

Suppose you start a trucking business. Initially, you own one truck and deliver all the freight delivery yourself. But since you provide excellent service, your business grows. Consistently delivering your freight on time and in good condition results in numerous referrals.

Before long, you have five trucks and you don’t need to go out on the road any more. But one reason your business has grown is because you’ve made it easier for new clients to pay you. You’re now extending credit to new clients to get more business. This means that they can pay you after a certain period of time. It might be 30, 60, or 90 days. In the meanwhile, your creditors are not going to patiently wait. The landlord of your facility wants his rent every month. Your drivers want their their biweekly paycheck. And your local gas station wants cash every time you fill up any of your tanks. Although on paper, you are making a profit, you now have negative cash flow.

Fortunately, you are not alone. Many trucking businesses have been in your situation before you. In response to this problem, lenders devised a viable solution called factoring. 

Here is how one family-owned trucking and logistics company explains their TBS freight factoring service: 

“If a load is not paid because of a credit problem then TBS takes the loss. Credit protection is very important because every month brokers and shippers go out of business still owing money to motor carriers. This typically works well for companies with 1-5 trucks that haul for numerous customers and for carriers with a low credit score.”

Takeaway

Although this analogy is about a truck business, you can apply it to any small business . If you have negative cash flow in your business because you give your clients credit,  invoice factoring will balance your cash flow.

Two, create a reserve fund for your future.

Usually, the first few years of an entrepreneurial business are the toughest. The way to grow your business beyond living from paycheck to paycheck is to create a reserve fund. This is a portion of your income that you simply tuck away into a savings or money market account. Your goal is to contribute to this fund whenever you have surplus income. You can also just designate a percentage of your income to it.

This reserve fund serves two purposes:

The first purpose is to bail you out if a client is slow to pay, a client does not pay, or you have an unexpected cost that exceeds how much you earn.

The second purpose is to allow you to seize an opportunity when it appears. The opportunity might be buying an educational course that will increase your skill levels so that you can charge more for your services. It might be a way to invest in another business that will provide a second income stream.

Although the reserve fund is your money, you should treat it as if all the money you borrow from it, either for an emergency or an unexpected business growth opportunity, has to be returned. In other words, imagine that the funds belong to a third party and you are obligated to return the money you borrow.

In order to create this reserve fund you have to live below your means. When you know your minimum cost of living, you know how much to take out of your income to tuck into your reserve fund. Thus, the reserve fund is the difference between what you take out of your business (revenue minus expenses) and your minimum cost of living.

 Three, remain a good financial steward after a financial windfall.

Sometimes you may have a financial windfall. Many clients hire you, you get a huge tax return, or you experience some other amazing luck. A financial windfall can throw you for a loop. You may then decide to rapidly grow your business, create a new income stream, or just improve your standard of living. Instead, simply tuck the money into your reserve fund and continue to do what is working. Rapid growth can undermine your business. You will end up juggling more balls than you know how to handle and may end up dropping all the balls. Instead of leaping ahead, you will now have to start over.