The number of small businesses keeps growing the Nigerian economy. According to the Nigeria Bureau of Statistics (NBC), there are a total of 41.4 million SMEs in Nigeria. Nigerian small businesses account for 50% of industrial jobs, 84% of employment and 90% of the manufacturing sector. Considering the statistics, it’s evident that small businesses in Nigeria make a big impact on the economy and employment.
No small business owner likes being strapped for cash; however, cash flow mismanagement is common in most Nigerian small businesses. Proper money management is extremely crucial to the survival of every small business. Money management is the process of handling your finances by tracking expenses, budgeting, setting goals, and investing. Improper money management practice might lead to problems like making late payments, running out of money, and passiveness in collection of accounts receivables. Small business owners need to be equipped with good management skills and abilities to turn their venture into a success story. 42% (almost half) of small business owners in Nigeria report that handling cash flow is challenging. In fact, Fundera found that 20% of all small businesses fail within the first year, so it’s important that you develop good money management practice right from the beginning. Small businesses tend to have smaller profit margins, so it’s essential to keep careful control of your costs.
Here are five easy tips on how to manage your expenses in a small business effectively.
1. Separate your business and personal finances
Do you have a separate bank account for your small business? It is recommended that your small business should be separate from your personal life financially. Many small businesses in Nigeria have suffered a setback because their owners mix personal accounts with business accounts. As a small business owner, you’ll need to separate these two to avoid having disorganized records that lead to overspending and to dipping your hands into your business funds. One way to maintain clear separation is to have a personal budget and a business budget. Separation of finances will not only enable you to manage your finances effectively and track your profits but also ensures that your business funds will not end up solving personal problems. Having a corporate bank account for your business does not mean that you can’t spend your money but will enable you to store your business’ profit and make you to have a clear picture of your expenses. This will in turn assist you to identify which of your expenses generates the biggest ROI (Return on Investment).
2. Manage your inventory
Are your newly stocked purchases necessary or do you order too much inventory that end up collecting dust in your storage room or are you constantly running out of goods in demand that cause you to say no to your customers? Proper management of your inventory will help you in managing your finances in your small business. Monitor and record how much inventory you have on hand in your business and so that you will never have too much or insufficient inventory.
3. Create a clear budget
In order to monitor and adjust your performance in a small business, you must put in time to create and keep up with a realistic business budget that you can stick to. This will help you to set revenue goals and manage your expenditure by giving you a clear picture of how much you can spend and make sure you don’t go overboard with spending. It will be easy to manage your spending money when you know how much you can spend. A realistic budget will also forecast the amount of revenue of your business and if you find out that your revenue is lower than budgeted, find ways to cut expenses and increase income. An effective way to achieve this is to set a budget for operational, marketing and other expenses in a monthly basis. In order to create a realistic monthly business budget, you must first calculate your income, then your costs and determine your profit from these figures. This will serve as a guide as to how much you can afford to spend every month and allow you to set a cap on your expenditure. Your business budget should be reviewed and updated regularly; an outdated budget is of no use to any small business.
4. Monitor your finances and make frugality your habit
As a small business owner in Nigeria especially in the early stages, it is important to be frugal with your expenses in both your business and personal life. This is because starting and operating a small business in Nigeria can be costly, therefore, cutting out some of the unnecessary and luxury expenses is important for the financial health of your business especially when you need extra cash to run your business. If as a small business owner, you’ve been spending on unnecessary things, you can find yourself caught off guard by your expense volume. In order to prevent this financial challenge, keep track of your expenses at all times and be prepared to cut down on them since these unnecessary business expenses can quickly add up and cause issues. In the same vein, your cash flow will be at a big problem especially if you’re spending more than you’re earning. Hence, it is very important to always spend prudently and keep track of what goes out of your business financially.
5. Keep track of payment deadlines
Some deadlines such as those enforced by external parties have to deal with money and are more important than others. As a business entrepreneur, it is imperative you record when the bills such as business loan payments and accounts payable are due. If you don’t know when your bills are due, payment of your debts, business loans, or credit card payments on time might not be possible since you might not have enough cash on hand and you may have to pay back with extra interests or late fees charge. To stay on top of your deadlines, get on a consistent payment schedule, record when payments are due and most importantly, set reminders on your phone so you don’t fall behind.
There’s a saying in business that goes like this: “look after the kobo and the naira will look after itself”. When it comes to managing a small business, every little decision made counts. Therefore managing your business expenses in the beginning, monitoring your daily, weekly and monthly expenses, maintaining a positive cash flow in a business, planning prudently and learning from the blunders of failed entrepreneurs are important in establishing a successful small business. It is not an overnight journey, neither is it a magic formula. However, proper attention to the above 5 tips can help you to attain a financially healthy long-term business destination.