Money management is a business activity that ensures the optimal utilization of company funds. It involves budgeting, saving, investing, spending, and overseeing capital usage. Money management is critical as businesses need it not only to maintain operations but also to achieve liquidity and solvency.
Here are five money management strategies small businesses can use to optimize their capital utilization.
Manage Accounts Receivable
Money management is not merely about managing expenses and debt payments. It is also about ensuring that the company has enough funds to pay for them. One way of ensuring this is through accounts receivable management.
If the company should allow credit sales, it must first ensure that its customers are credit-worthy. Creditworthiness can be assessed through a bank reference, trade reference, credit rating, and customer financial statements. These checks should be carried consistently, even for existing customers to continually update credit reports and detect early warnings should problems arise.
Set Credit Terms
Credit terms include the credit limit, payment period, early payment discount rate, and penalties for late payment. Setting these terms will depend upon the company’s financial condition and goals.
The company can choose to vary the credit terms for every customer. For example, the company can offer a strict credit policy to customers with low credit ratings. This means that the customer has to pay his credit within a shorter period. However, the enterprise has to carefully plan its credit terms, as tight policies may turn away customers.
Speed Up Collections
Receivables are one of the primary sources of liquid funds in a business. To ensure that the firm has steady cash for its activities, it should encourage early customer payment. Constantly monitor and follow up on maturing receivables. Making invoices clear and complete prevents delays caused by confusion and disputes. Additionally, the company could accept convenient payment options like mobile wallets or debit cards.
Manage Accounts Payable
As the company should speed up receivable collections, the ideal strategy for payables is to delay its payment until the maturity date. The idea behind this is to use the money for other purposes in the period that the payable is yet to mature. For example, they can invest the money in a highly liquid investment vehicle to earn an income while not in use.
However, the company should also consider the benefits of early payment discounts and rebates in managing the accounts payable. The firm’s payment practices could also affect vendor relationships. The business may work out a good deal with its suppliers instead, like paying in installments, to ensure an uninterrupted inflow of supplies while maximizing free cash flow.
Monitor Cash Flows With Modern Business Tools
Increase accuracy and efficiency in the company’s money management tasks by using modern accounting tools. With small business accounting software like KIPPIN, the company can automate the implementation of the company’s money management strategies.
Bookkeeping software can help companies quickly identify unpaid invoices and automate follow-ups on receivables. It also allows the company to create a list of customers and vendors to conveniently monitor the company’s activities and transactions with them. Payments may also be scheduled on the platform so the business can decrease the chances of late payments.
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