Your Financial Update #3
Introducing good financial management for SMEs
If your eyes glaze over at the mere mention of income statements and balance sheets, it’s time to sit up and pay attention. “Proper financial management, recording both your historic performance and projecting the future cash flow and financial requirements of your business, can mean the difference between long term success or failure in the business world,” says Dennis Isaacs Head: SME at Standard Bank.
“Standard Bank is committed to supporting Namibia’s Small and Medium Enterprises (SMEs) in order to boost Namibia’s economic growth. One way of doing this is sharing useful business tips and information with SMEs,” says Isaacs. Following good financial management principles is vital to achieve success in your business.
When setting up your accounting system you should first decide whether you’ll use a cash or accrual system. Cash accounting is when you keep a record of income and expenses and when cash is actually received or disbursed. This system requires less record keeping and is therefore much simpler than the accrual system.
Accrual accounting is used when a transaction or sales takes place, not necessarily when you get paid. So when you issue an invoice, you record the income even though you might not have been paid yet. Similarly, you must record an expense when you receive goods and not when you pay for them.
Although the accrual system is more complex it does provide a better measure of profitability.
It’s crucial to manage your budget effectively. It tells you what you spend each year and how much you need to make, helping you to set goals and prioritise your finances.
You can get the most out of your budget by following these guidelines:
- Set specific goals;
- Use a lot of information when planning such as past financial statements and invoices;
- Set money aside for fixed and variable and periodic expenses. Allocate fixed expenses that occur each month on a set date with a set amount. Variable expense can be controlled by monitoring what you spend and deciding whether to reduce or increase it;
- Review your budget monthly and check it against your plan.
- A budgeting tool is helpful and should form part of your software accounting package.
The other aspect of business that many owners neglect is cash flow. This is the pattern of money coming in and going out of your business and can determine if you stay in business. Here’s how to manage it better:
- Look at when you expect to receive money and to pay it out.
- Keep an eye of three main cash flow accounts – accounts receivable, accounts payable and inventory.
- Examine supplier and customer credit terms. Understanding how these relate to each other can help you pre-empt potential problems.
- Ensure there are processes to keep cash flowing in as well as out. For example, send out invoices as soon as the job is done and not at the end of the month.
- Know when your customers pay you and when they fall behind.
- Offer discounts for early payment.
While it may not be as exciting as all the other business aspects, correct financial management is the backbone of your business. Taking care of this will assist you to make your business successful.
Standard Bank offers a newly tailor-made SME current account boasting unique features. For more information, visit your nearest Standard Bank branch or www.standardbank.com.na or the Standard Bank Facebook page.
For more information contact:
Standard Bank Namibia: Manager PR and Corporate Communications
E Mail: email@example.com; Tel: +264 (61) 294 2529