by Anand Srinivasan, founder of LeadJoint.com
Tracking your business expenses is absolutely critical to managing a healthy cash flow. Yet, thousands of businesses continue to be ‘penny wise, pound foolish’. One survey of over 500 CFOs and finance professionals revealed that over 10 percent of businesses still used pen and paper for managing business expenses.
Over a third of the surveyed businesses making use of Microsoft Excel or other generic spreadsheet tools were only marginally better at managing their expenses.
Fixing your working capital.
The first step towards better expense management is understanding your working capital situation. Working capital is the cash a business needs to survive on a day to day basis. A business spending $10,000 dollars on inventory to sell $30,000 worth of goods is technically making a profit of $20,000 (considering all other expenses are nil). However, if you have a 90 day credit period with your buyers and only a 30 day credit period arrangement with your suppliers, then this would mean that you must pay your suppliers within 30 days, but will only receive your payment from your buyers after 90 days.
Chances are that you will be required to have at least $20,000 worth of cash to procure your products for the second and third month (till your payment for the first month comes through). In an ideal scenario, buyers must have a shorter credit period that what you have with your suppliers.
Ensure proper accounting.
A lot of businesses, especially those that have external investors to answer to, tend to resort to confusing accounting tactics that conceal the real health of a company. For instance, a $100,000 loss on a campaign may get tranched and spread through multiple financial periods. Some of these accounting practices may also be illegal. As a result, the actual loss made by your business in a financial year may be much higher than what is revealed in your accounting books.
As a business owner, it is important to see the fault lines much before they are out in the open for all to see. For this to happen, it is important to adapt proper accounting practices that do not serve the sole purpose of embellishing your financial health.
Invest in automated payment systems.
It is common for businesses offering services to sign annual contracts with their clients. Under this arrangement, clients are requested to make equated payments each month for the services being rendered. Raising invoices each month and following up with your clients can be a resource-intensive process. This can be especially painful if you deal with hundreds of clients.
To fix this, invest in an automated payment system. Such applications set up recurring invoicing systems that raise invoices and follow up with clients automatically. Not only this, such tools can also process payments without the client having to approve each month. Such systems can bring down human intervention on both sides and is thus highly recommended. Such systems, when they are integrated with your accounting software, can also record your payments and expenses thus automating another critical component of your business expense management.
Managing your expenses is extremely important to keep your business healthy and in the black. Invest in the right tools and accounting practices in order to ensure that you have complete control over where your business is headed.
Anand Srinivasan is the founder of LeadJoint.com, an online lead generation tool for digital marketing agencies. He is also a part-time marketing consultant and has previously worked with some of the most promising Indian startups.