Updated on: Oct 4th, 2021
12 min read
Managing business payments and finances can be challenging for a business owner. Business owners need to know how to manage the financial aspects of the business effectively, or else it will lead to bad financial habits that could harm the business. Sound financial management of a business will lead to growth and profit.
Business owners need to understand the basic financial aspects required to run a business, such as doing simple accounting tasks, bookkeeping, understanding credit, etc., to create a stable financial future and avoid failure. Below are few financial practices that will help you manage your business payments efficiently:
Every business needs to have a bank account where the business transactions are maintained. You need to open a business bank account in the name of your business with a bank of your choice. Choose the business-friendly bank that you want to work with to open your business bank account.
You need to submit both personal and business-related documents to open your business account. All your business payments, business loans and invoice payments will be through this account.
Since all your business transactions are carried out through your business account, you need to get corporate or business credit/debit cards for that account. You can do payments and cash withdrawals for business transactions through your corporate or business cards.
Ensure that all your business transactions will be through this account and not your personal account, as it will be easy to manage all your business payments and finances when it is done through the business account. Do not use your personal funds or personal account for transactions involving your business.
Get a cheque book, if required to deposit your funds in your business bank account. Deposit business funds regularly into your business account as it will maintain liquidity in your business account. It will also help you keep your business and personal transactions separate and prevent mixing your personal funds for business. Depositing regularly to your business account will help you maintain good credit, which in turn will help you obtain business loans when you require them.
Ensure that your invoices get paid on time, as it is critical for any business. Getting payments from your customers on time will help your business’s cash flow. Do not delay in issuing invoices/bills to your customers. Create invoices/bills as soon as the work is done, as you may forget to issue invoices later on and lose track of your receipts. It will also help to maintain your books of accounts.
Sometimes, commercial clients will want some type of credit on a revolving-account basis, such as 30 to 120 days after completion of a service or delivery of the product. You can offer a minimum percentage of discount if invoices are paid within one week to avoid credit. However, if you extend credit on your invoice/bill, make sure to conduct a credit check first, especially when a large amount of money is at stake.
Download the sample invoice here.
A budget will help you manage your business funds efficiently. Include the fixed and variable costs and profits in your budget. It will give you an overview of your cash flow. In the beginning, you may make mistakes and fail to include all expenses on a monthly basis, but with time you will be able to adjust your budget more accurately. You can look at your budget when you need to reduce your business expenditures to improve the revenue.
Tracking all your business expenses will help you improve your business and cut down on unnecessary expenditures. You should know where the money goes out and where it comes in. You can maintain a book or choose an expense tracking app to track your business expenses and store your receipts. When you hire employees, track your employee expenditures to prevent any fraud.
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You need to maintain separate business accounts for better bookkeeping. The basic types of business accounts include income or revenue, expenditure or expense, assets, liabilities, and equity. Every business transaction needs to be recorded under the appropriate accounts to match the books at the end of a year or quarter and determine your business’s overall profits or loss.
Once your business accounts are in place, you will need to have a bookkeeping system for your business. Bookkeeping is the process of recording, maintaining, classifying and summarising business transactions. It helps prepare the financial statements and provides information on the cash flow, profit or loss, etc.
You may do bookkeeping on bookkeeping software or excel sheets or by appointing a bookkeeper. Bookkeeping consists of preparing cash flow statements, the profit and loss account statement and the balance sheet.
Once your bookkeeping system is established, you will need to audit your books regularly to identify issues. You can appoint an accountant to audit your books of accounts. It includes analysing, summarising and reporting the financial transactions to the regulators, agencies and tax authorities. Auditing your books will provide information on your business finances to your investors and clients and help you succeed in your business.
Every business owner needs to establish a payment-term policy. Payment terms include terms and conditions related to deposits, payments and extending credit. It is important to establish clear, written payment terms with customers or clients before delivering products or providing services to avoid payment conflicts.
Communicate your payment terms to your customers, especially commercial clients, before doing business with them so that they are clear of your payment policy. However, you will need to be flexible with your payment terms to meet the clients’ requirements individually. A ‘terms and conditions’ document throws light on the service itself and accurately explains the policies of the company. Download the Sample ‘Services Terms and Conditions’ document below.
There are different payment methods, such as cash, cheque, mobile payments, etc., through which your clients can pay you. You need to select and establish the mode of payment that suits your business. However, the best way to establish your business payment method is by being flexible and making a facility for payment through all payment methods.
By being flexible and adopting all payment methods, there will be no delay in payment from your clients and ensures timely payment. Plus, many businesses have changed to having all payment methods to facilitate customers and give them a choice of payment mode.
However, you need to choose the payment options wisely and encourage payments with less transaction fees. The different payment methods are as follows:
Cash payment is the most common method of payment. But due to technological advancement, people prefer to pay by card or online. Nowadays, cash payment has become significantly low. There are many advantages of cash payment.
The first advantage is it maintains the cash flow of the business. There is no processing time required or transaction fees involved in cash payments. You receive money immediately, and thus, you can use it to pay bills and invest in business activities to increase profits and revenues.
The major disadvantage is that having cash is risky as you could get robbed or lose it. You could deposit the cash payments regularly in the bank account to keep it safe and prevent losing it.
In a service business, one of the popular methods of payment for services is through cheque. Commercial clients also make payments through cheques where the amount is huge. The advantage of a cheque payment is that it is convenient to carry around. A post-dated cheque can be issued, which may be good for the business.
However, cheque payments may not be ideal for small businesses as they require time to be processed by the banks after it is deposited. If the cheque bounces for some reason, you will have to contact the customer and ask to pay the amount through some other method or issue another cheque, leading to a delay in payment.
A debit card or credit card is another common method of payment the customers use to make payments. You will need to buy a card payment terminal device to accept card payments. Paying with cards are convenient and can facilitate a better checkout process. It allows customers to make large payments; thus, most customers expect businesses to accept card payments.
However, the card payments carry a transaction fee on the purchase price to process the payments. You will also have to wait for the payment transaction to be processed before getting the money in your account.
Mobile payment allows customers to exchange currency electronically through their mobiles. Mobile payments are made through digital wallets, such as Paytm, Google Pay, PhonePe, etc. The money is transferred immediately to your bank account.
You need to download and register your mobile number and business on the digital wallet app to obtain a QR code. The customers can then make payments through their digital wallets from their mobile phones by scanning your QR code.
Mobile payments offer a faster and cheaper way to get paid, giving consumers faster check out. It saves time, reduces the risk of error in payments, and you get the exact change.
Internet banking payment mode consists of Immediate Payment Service (IMPS), Real Time Gross Settlement (RTGS), and National Electronic Funds Transfer (NEFT) in India. Some customers prefer to transfer payments through one of the modes of internet banking.
Internet banking is a safe method to transfer funds wherein the payment is transferred directly from the customer’s bank account to your bank account electronically. Usually, huge amounts of payment can be made through RTGS and where the amount is below a particular limit as fixed by the Reserve Bank of India (RBI), the payment can be made through NEFT.
Both RTGS and NEFT payments process faster, usually within a day or two. However, you need to share your account details with the customers or clients to receive money through RTGS or NEFT.
Managing the finances of a business is an integral part of the business. You need to maintain your books of accounts regularly to keep track of your expenses and revenues. When your books are correctly maintained, you will know the exact profit or loss incurred by the business. At the same time, it is also essential to set up payment methods and have a business account to handle your business transactions.
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