Manage Your Business Money Like A Pro: Most Common Mistakes of A New Business!

Managing money effectively is essential to the success of any business. Without proper financial management, businesses may overspend, fail to plan for the future, and miss out on opportunities to grow. 

One prominent example of how bad money management can lead to bankruptcy is the case of the retail chain Toys "R" Us. Despite being a beloved brand and a staple in the toy industry for over 70 years, the company filed for bankruptcy in 2017 due to a combination of factors, including poor financial management.

Toys "R" Us had taken on a significant amount of debt, which they struggled to manage, and they also failed to invest in their e-commerce strategy, which left them struggling to compete with online retailers like Amazon. Additionally, the company was unable to keep up with the changing consumer trends and failed to pivot their business model accordingly.

These factors, combined with intense competition, led to a decline in sales and revenue. Ultimately, Toys "R" Us was unable to meet its financial obligations, including paying its vendors and employees, and was forced to declare bankruptcy. The company ultimately shut down all of its stores, leading to the loss of over 30,000 jobs and a significant impact on the toy industry. This example highlights the critical importance of effective financial management and adaptation to changing market trends to avoid financial ruin.

In this article, we will cover seven key strategies for managing money in business, with examples and calculations to help illustrate each point.

1. Create a budget

Creating a budget is the foundation of good financial management. A budget is a detailed plan that outlines all of a business's expected income and expenses for a given period, usually a month or a year. By creating a budget, businesses can anticipate their financial needs and plan accordingly.

For example, let's say you run a small retail store that sells clothing and accessories. Your budget might include the following items:

Rent: $2,500 per month

Inventory: $5,000 per month

Salaries: $4,000 per month

Marketing: $1,000 per month

Utilities: $500 per month

Total budget: $13,000 per month

2. Monitor cash flow

Monitoring cash flow is the process of tracking the amount of money that is coming in and going out of a business. This is important because businesses need to have enough money to cover their expenses and invest in growth opportunities.

For example, let's say you have $20,000 in sales for a given month, but you also have $15,000 in expenses. This means you have a positive cash flow of $5,000 for the month. By tracking your cash flow, you can anticipate potential cash shortages and plan accordingly.

3. Separate business and personal finances

It's important to keep your business finances separate from your personal finances. This means having a separate bank account and credit card for your business. Mixing personal and business finances can create confusion and make it difficult to track expenses and income accurately.

For example, if you have a personal credit card with a limit of $10,000, you should not use it to make purchases for your business. Instead, you should open a separate credit card account for your business and use it exclusively for business expenses.

4. Control expenses

Controlling expenses is an essential part of managing money effectively. Businesses can control expenses by negotiating with vendors, finding more affordable office space, or reducing their marketing budget.

For example, if you negotiate with a vendor to reduce the cost of your inventory from $5,000 to $4,500, you can save $500 per month. By reducing unnecessary expenses, businesses can increase their cash flow and invest in growth opportunities.

5. Use credit wisely

Credit can be a useful tool for businesses, but it's important to use it wisely. Businesses can use credit to purchase equipment, finance growth, or cover short-term expenses.

For example, if you need to purchase new equipment for your store, you may choose to take out a loan instead of using a credit card. If you take out a $10,000 loan with a 6% interest rate, you will pay $600 in interest over the course of a year. By using credit wisely, businesses can avoid high interest rates and mounting debt.

6. Build an emergency fund

An emergency fund is a cash reserve that businesses can use to cover unexpected expenses, such as equipment repairs or legal fees. By building an emergency fund, businesses can protect themselves from unforeseen financial setbacks.

For example, if your monthly expenses are $13,000, you should aim to have $39,000 to $78,000 saved in your emergency fund. By setting aside money for emergencies, businesses can avoid the need to take on debt or miss out on growth opportunities.

7. Plan for the future

Planning for the future is essential to long-term financial stability. Businesses can plan for the future by setting goals, forecasting revenue and expenses, and creating a financial strategy.

For example, let's say you want to increase your sales by 20% over the next year. To achieve this goal, you may need to invest in marketing or expand your product line. By forecasting revenue and expenses and creating a financial strategy, you can make informed decisions that will help you achieve your goals.

Managing money effectively is critical to the success of any business. By creating a budget, monitoring cash flow, separating business and personal finances, controlling expenses, using credit wisely, building an emergency fund, and planning for the future, businesses can achieve financial stability and success. Remember, these strategies are not one-time solutions, but ongoing processes that require diligence and discipline. By making financial management a priority, businesses can thrive and achieve their goals.