There’s a lot to think about when starting a family business for the first time and prudent money management should be at the very top of that list. It’s important to put financial best practices into place so that you can manage your money well and create good habits going forward. Let’s take a look at five essential money management tips you need to know about.
1) Create a Budget and Review It Regularly
Creating a family business budget can be difficult when you’re first starting out, but it’s an essential step towards good money management. It’s hard to predict unforeseen costs when you have very little experience, and it can be hard to know how much you will earn or spend without past data to inform you.
Start by creating predictions to see you through your first three months in family business. Be conservative with your earnings estimates. It’s also best to overestimate your expenditure when in doubt and create a buffer for unforeseen costs such as legal fees and equipment repairs.
Review this budget regularly at least once per month. This will help you to understand where you may be overspending and which sources of revenue are performing the best. Furthermore, as you begin to trade and establish a history, you can use your numbers to create more accurate budgets going forward.
2) Prioritise Bookkeeping
The longer you ignore your books, the more difficult it will be to sort them out when the time comes. It’s best to take the little-and-often approach to bookkeeping and track all of your income and expenses from day one, even if those numbers are very low, or even zero.
Some family businesses start out by using a spreadsheet but it’s best to adopt cloud based accounting software as early as possible, because this will save you a huge amount of time. As well as making it easy to upload and organise receipts, accounting software can automate your invoicing and flag up accounts which are past-due. It will also enable you to visualise your spending through the use of charts and graphs, and identify which products and services are most profitable.
3) Create an Emergency Fund
Emergencies can – and do – happen in family business, and it’s always best to be prepared. If not, an emergency situation could end up crippling you, as was the case for many family businesses around the world when the covid-19 pandemic hit.
Whether it’s a low-selling month, a broken piece of equipment or a sudden hire, it’s important to plan ahead for these less than ideal scenarios so that you are ready to face them if and when they occur. Without a financial buffer in place, even a fairly minor emergency could do some real damage to your family business and lead to cash flow issues or cause you to incur debt.
A family business credit card is a good way to smooth over short-term cash flow issues, but credit cards tend to come with high interest rates so it’s always best to have some cash set aside, too.
It may be tempting to invest your emergency fund into a high interest account but you need it to be accessible at a moment’s notice, so an easy-access ISA or savings account is best. You should ultimately aim to cover three to six months’ worth of expenses in a worst-case scenario, but that’s a lot to put away in one go. Start with what you can and then create small, achievable savings targets and build your emergency fund over time.
4) Remember that Time is Money
It’s a huge cliche but time really is money when it comes to family business. When you start your own family business you often have to wear a million different hats and do everything on your own, but it’s important to outsource as you grow.
Budget your time as you would your money and spend it on the high value tasks that you are best at. Each task has a monetary value, so don’t squander your time on a $10 task when you could be solving a $1000 problem instead.
Furthermore, certain higher value tasks may require expertise that you don’t necessarily have. For example, you would probably be far better off outsourcing your bookkeeping to a professional bookkeeper with years of experience, or website maintenance to an IT expert who can fix your issues in a fraction of the time it would take you.
No-one said running a family business was easy, but implementing best financial practices from day one certainly will make money management significantly easier. Employing the above tips will allow you to identify opportunities and problem areas far sooner and set your business on the right path towards success.