Financial Management for the Small Business

By: Prof. Samuel Lartey

sammylaatey@yahoo.com
There is no gain saying that financial management, cash flow, budgets, and liquidity is the
lifeblood of all businesses. The small business owner, like the giant business manager will
always call for cash in order to implement their business ideas. Cash flow management is
therefore a key component of financial management of any business. It allows the business
manager(s) to plan the present and future cash requirements to avoid a crisis of liquidity.
Cash flow management is important because if a business runs out of cash and is not able to
obtain new finance, it will become broke and extinct. As a result, it is essential that
management systematically predict what is going to happen to cash flow to make sure the
business has enough to survive. The flow of cash through a business may be likened to the flow
of water through a central water heating system. Too little cash/water or factors impeding a

smooth and continuous flow of cash/water, create problems. Without an adequate flow of
cash, a company may be trading profitably in the shorter term, but will nevertheless collapse.
In small businesses, the inflow originates from very many sources:
(1) When the would-be owner(s) of the business, promoter or shareholder(s) if it is to be a
limited company invest their own funds, which go into the pool of cash
(2) There may be subsequent investments for a variety of positive(s) such as business
expansion or negative(s) such as shortage of liquid funds/cash.
(3)At the same time, or again later, lenders, investors and financiers may also put funds into
the business. The lenders may be the firm's bankers or, in some cases, members of the family
or friends of the owners of the business.
(4) In some instances, to enable the business to start trading or expand business, the owner(s)
may consider obtaining goods and services on credit from suppliers who become creditors.
(5) Consideration will be given to obtaining fixed assets and capital expenditure items. These
may range from freehold buildings to office equipment, from bicycles to motors and from cars
to trucks. You will recognise that if acquisition is based on purchase, and if relevant assets are
truly fixed, some liquid capital has been immobilised immediately.
On the other hand, just as in every business, cash also flows out of the business in the form of
salaries and wages and other expenses which may include, for example, stationery and
additional computer software(s). If the new firm is to manufacture, or produce tangible
consumables, it will require raw materials and other inputs these represents outflow of cash.
Sooner if the materials are paid for, 'not so much later' cash flows out unless such purchases
are made on credit. The expenditure of wages and other expenses including for example tools
and equipment, together with the use of some of the raw materials will lead to the creation of
saleable stocks.

Challengingly, the cycle is not complete. At the appropriate time, cash will be moved from the
business coffers/treasury/bank account to pay expenses, taxes, to make payments to creditors,
to make repayments of capital and payments of interest to lenders and to make payments of
dividends or other forms of reward to the owners, the original investors.
It is worth mentioning that the cycle and flows of cash-in and cash out, starts again and to
follow the sequence of the flow of cash and the sequence wish and demand for cash is never
ending. If it stops, there is an explosion and, as in the case of central heating, the whole system
will stop. Without an injection of cash, trading will cease and the firm will be wound up. This
call for effective financial and cash flow management.
How often management should forecast cash flow is dependent on the financial security of the
business. If the business is struggling, or is keeping a watchful eye on its finances, the business
owner should be forecasting and revising his or her cash flow on a daily basis. However, if the
finances of the business are more stable and safe, then forecasting and revising cash flow
weekly or monthly may do the trick.
Effective financial and cash flow management will allow the owner(s) to know where the
business cash flow is tied up. One can spot potential bottlenecks and act to reduce their
impact. One can reduce the dependence on the business bankers and save interest charges.
With such practices, one can be in control of the business and can make informed decisions.
Some form of control is necessary to guard against theft, obsolescence, spoilage, running out
or having too much or an unbalanced stock, any of which can penalise a business severely. The
manager(s) must have a system in place to predict/forecast what the business expect to sell
and when. Knowledge of the present stocks, and financial information provided at regular
intervals keeps the business healthy.
A record of supplies received and deliveries made must be periodically reconciled with present
stocks. A predetermined and regularly reviewed re-order levels and quantities must be
checked. Have a knowledge of price trends, quantity discounts and the time which will elapse

from the placing of an order until delivery. Depending on the size of the business, and the
complexity of operations, one can check stock levels periodically. Has a perpetual inventory
system or a cyclical stocktaking procedure using staff as and when fluctuating workloads make
this possible. Are your stocks neatly stored in a way that makes stocktaking easy and
eliminates the risk of contamination, obsolescence and damage? Remember that the business
stocks represent the cash of the business.
There is a direct relationship between the amount and length of credit allowed and the return
on capital and net profit which a firm can make. It is assumed that in most cases it is more
important to obtain the quickest possible turnover of capital rather than to produce an
additional return on capital 'lent' to a customer. Make sure the method employed recovers the
cost of extending credit and gives the customer the greatest continuing incentive to pay
promptly.
Keep an eye or have one person in your firm who is ultimately responsible for supervising
credit(s) and for ensuring the prompt collection of monies due and who is accountable if the
credit position gets out of hand. The exercise of their authority should not detract from the
individual salesperson's relationship with the customer - nor from the individual salesperson's
responsibility for seeing that the sales which they make are paid for in accordance with the
firm's credit terms. Have a clear-cut maximum credit policy. To create consistency, have it
written down. It must be known to all your sales staff.
How soon do your invoices go out after the goods are dispatched? Can this be speeded up?
How soon do monthly statements go out following the last day of the month? Can this be
speeded up? Are the terms of sale clearly and precisely shown on all quotations, price lists,
invoices and statements?
Do you have a collection procedure timetable? Do you stick to it? Are you politely firm but
insistent in your collection routine? Inappropriate Financial Management and Cash flow
management had killed many large businesses and will do so again if care is not taken in
managing the basic financial and cash flow indicators in the small business.