7 great money habits for business owners

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7 great money habits for business owners

Being your own boss takes courage and smarts. Here are seven easy-to-action tips to help your business finances flourish and see you reap the rewards.

A great idea, a different way of doing things, a gap in the market: the catalyst for starting your own business might be driven by financial gain and independence and for those who get it right, the profits can be rewarding.

It’s a big step going out there on your own and unfortunately, many new businesses fail due to ‘inadequate cash flow or high cash use’, as well as ‘poor strategic management’.1 Here are seven book-balancing tips that can help you manage your finances in the early years of building your business.

1. Set financial goals

Goal setting with near and long-term objectives can direct and motivate your daily, quarterly, and yearly activity in line with your overall business growth targets. Set SMART (Specific, Measurable, Attainable, Realistic and Timely) goals, with a plan for how you’re going to achieve them.2 Rank your goals in order of time and priority, and track your progress against your own KPIs to measure success. It doesn’t have to be complicated; a simple spreadsheet could suffice.

2. Budget for the year, by the month

Your business’ annual budget should take you from where you are at the beginning of the year to where you want to be in twelve months’ time. It should outline your monthly income, expenses, assets, liabilities and equity, while establishing what you can afford to save, spend, repay, and reinvest each month. Your budget should also account for seasonal factors.3 Most importantly, be realistic: there’s little point to financial estimating if you’re way off the mark!

3. Get to know your cash flow – intimately!

In an ideal world, you’d pay your staff, bills, materials and invoices after you’d received payment from your clients. Such a perfect balance of money coming in and out rarely happens! Welcome to the world of cash flow management, a skill that can make or break a business.4

You need to forecast so that at any point in time you have the cash to run your business.5 Once you’ve done your monthly budget, it may become clear that some months you may make a loss. Accounting for those in the red, you’ll need to set aside funds to meet your expenses during months with negative cash flow. You should leave some buffer room for late payments and a contingency for bad debt.

cash-flow.jpg

4. Invest in yourself, your staff, and your business

With all this talk of budgeting and cash flow, you may hesitate to spend money. Investing in your business is crucial for future success. Equipment, education and courses, hiring a business coach, attending business events6 and marketing/advertising for example all require an up-front investment, but present a greater opportunity cost.

5. Decipher between needs and wants

We’ve all got an idea of our perfect business set up, but the reality is that “needs” have to come before “wants” and compromise is a big part of a business’ early years. This doesn’t mean compromising forever though. Consider the short-term loss with the long-term gain, and weigh up the best course of investment.

Just like for a household, recognising what you want and what you need, and prioritising the purchase of “needs” first can streamline your spending7, reduce the risk of unplanned spending on the non-necessities, and ultimately free up capital for “wants” later on. Besides, over time you may rethink or reconsider the wants and the value they can add to your business.

6. Pay off loans strategically

Starting and running a business isn’t cheap: it’s likely you’ve taken out a loan or are considering debt finance as a strategy to set yourself up.8 Having a strategy or plan to reduce debt is important and can place your business in a better financial position.

Once you’ve worked out your debt portfolio, as it were, (how much you have borrowed, who with and how much interest you’re paying), prioritise paying back as much as your business can afford.9 Pay off the debt with the highest interest rate first and look at consolidating loans into one longer-term package.

7. Protect your income

Your business relies on your hard work and presence to be successful. An illness or accident that takes you out of action and stops you from being able to earn an income could have lasting impacts on your finances as the bills won’t stop coming in.10 In the absence of workers’ compensation or sick leave entitlements for the self-employed, income protection insurance *can make it possible for you to meet your personal financial obligations and provide for your family.

Managing finances is an inevitable part of business ownership. While tips one to six come down to you, Choosi can help with number seven. We can provide information and quotes on policies best suited to your needs, as well as help you with the application process. Call us on 13 55 55 to find out more about Income Protection Insurance or request an Income Protection Insurance quote today.

* For the policies Choosi arranges direct, Australian Residents between 18 and 59 must be working at least 20 hours per week for at least 12 months to apply.

References

  1. 14-254MR ASIC reports on corporate insolvencies 2013–14Australian Securities and Investments Commission
    http://asic.gov.au/about-asic/media-centre/find-a-media-release/2014-releases/14-254mr-asic-reports-on-corporate-insolvencies-2013-14/
  2. How to set goals and objectives for your businessDepartment of Industry, Innovation and Science
    https://www.business.gov.au/news/how-to-set-goals-and-objectives-for-your-business
  3. Cash flow statementDepartment of Industry, Innovation and Science
    https://www.business.gov.au/Info/Plan-and-Start/Develop-your-business-plans/Writing-a-Business-Plan/Cash-flow-statement
  4. Managing Cash FlowQueensland Government
    https://www.business.qld.gov.au/business/running/making-and-managing-money/managing-cash-flow
  5. Cash Flow ForecastingBusiness Victoria
    http://www.business.vic.gov.au/money-profit-and-accounting/getting-paid-on-time/cash-flow-statement-projection-with-template
  6. Opportunities for business growthDepartment of Industry, Innovation and Science
    https://www.business.gov.au/info/run/research-and-innovation/opportunities-for-business-growth
  7. Managing your money: budgeting, saving and spendingMoneySmart
    http://www.financialliteracy.gov.au/media/444953/managingyourmoney_msw.pdf
  8. Funding your businessQueensland Government
    https://www.business.qld.gov.au/business/starting/starting-a-business/funding-business
  9. Managing debtsMoneySmart
    https://www.moneysmart.gov.au/managing-your-money/managing-debts
  10. Self-employed peopleMoneySmart
    https://www.moneysmart.gov.au/life-events-and-you/self-employed-people

Posted: 26 Oct 2017

This is general information only and does not take into account your personal objectives, financial situation or needs. You should consider the relevant PDS available on this website prior to purchasing any product. Choosi offers insurance products from a range of brands but does not compare all products available in the market.

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