Financial Management: How to manage Debt & Expenses

Financial Management is one of the most challenging aspects of running a business, especially as it relates to debt management and expenses against revenue and cashflow. While there is no perfect method and each business must design a plan that best suits them, this articles outlines a few strategies and best practices to get started.

 

Financial Management Strategy #1: Debt Consolidation

Loan payments in whatever form they come in, be it credit cards, mortgages, bank loans etc. are an inevitability when running a business. Juggling multiple re-payments at varying interest rates and deadlines can be challenging and in times of lower than expected cash-flow, overwhelming.

One way to manage this is Debt Consolidation. If there are multiple debts of smaller amounts, identify a bank that can offer a large loan at fixed interest rates and use the money to pay off all other debts. This then leaves only one loan to track and repay. Some countries even allow for Reverse Mortgage, where loans can be taken against a mortgage. While this debt consolidation strategy combines both property and financial loans, it also poses a higher risk as payment delays and defaults can lead to loss of property.

 

Financial Management Strategy #2: Credit over Debit Cards

This strategy probably reads as counter-intuitive and in most cases it is. Credit card debt has been steadily increasing since the 80’s and often constitutes the largest percentage of debt in an average household.

Despite that, credit cards can be extremely beneficial to both individuals and a business if properly managed. Unlike Debit Cards, Credit Cards often have substantial reward schemes attached to them such as AirMiles, Points and even Cash-back schemes. Paying all your bills and expenses through the credit card can accumulate valuable points that can then be used to purchase business necessities or reduce overall expenses. Of all the Financial Management practices however, this one takes the most discipline.

 

Financial Management Strategy #3: Credit Card Management

It will be foolish to encourage the use of Credit Cards in Financial Management without also providing guidelines on how to effectively do it, so here are a few tips;

 

• Own only one credit card: Do the research and identify which reward system best suits the business needs. While multiple cards with multiple rewards can be tempting, this is also the fastest way to have things spiral out of control.
• Never purchase what you can’t afford: This statement should be a mantra to every individual or business and is at the core of good Financial Management practices. Always save until the purchase can be made debt-free, or does not require payment delays on recurring expenses.
• Pay in full, never the minimum: This practice ties together with the one above. The most commonly made mistake with credit cards is to only pay the minimum due, without realising that this never covers the principal. The card must be paid in full every month without fail to prevent debt ballooning.

 

Financial Management Strategy #4: Automatic Payments

Anyone with a Wallet app, mobile or internet banking has the Automatic Payment facility available to them. For small businesses that do not have the resources to hire an accountant, automatic payments can significantly simplify their Financial Management. Automatic payments are pre-defined rules that debit money from the account to pay approved expenses such as rent, utilities, salaries, loans or credit card bills on specific dates. Best practice is to have it set-up for the start or end of the month so that all necessary expenses are covered.

This strategy is one of the easiest ways to ensure that all expenses are paid on time and removes the need to remember deadlines. For businesses with erratic cashflow, building in additional rules such as prioritising which expenses to be paid first, automatic halts if the bank balance falls below a threshold etc. is a useful way to manage cashflow concerns that arises with this practise.

 

Are you a Finance Manager or Finance Professional interested in expanding your business knowledge or earning an academic degree? Speak to a Higher Education Consultant for more information on all Banking & Finance Courses such as the Online MBA in Finance or the Part-time MBA in Finance.