One of the factors that determine how long a business survives in the industry is its approach to small business financial management. According to a research report by Bloomberg, 82% of companies fail within 18 months of inception. One of the reasons quoted for this failure is the lack of a profitable business model to manage revenue streams.
Finance management can be a challenge for small businesses. Poor management can lead to bad habits that can crush the company. There are no fixed rules that can apply universally in small business financial management.
However, it’s good practice for every business to have a model that works for it. Have a deep understanding of the financial affairs of your business. This marks the best starting point to keep your finances in check.
Day-To-Day Management of Small Business Finances
The overall management of your business finances starts with how you handle your accounting from one day to the next. If you’re not an expert in accounting, it’s best to hire a bookkeeper to help you keep accurate track of your income and expenditure. Hiring a bookkeeper may feel like an extra cost, but it’ll save you in the long run.
Online Accounting Software
In this case, consider buying accounting software. A ledger encompasses features that draw a clear line between your cash inflows and outflows. There’s a wide variety of low-cost or free high-quality accounting software options which produce accurate results.
An example of accounting software you can use is QuickBooks Online. Its advantage is that you can access it remotely. It can also be shared between you and your accountant for a quick reconciliation of your accounts.
QuickBooks comes in several versions and levels to suit various business needs. More advanced versions can accept payments, create payrolls, or run point of sale software. Most business applications are available in the software, and most accountants are familiar with the software.
Whether you hire a bookkeeper or use accounting software, the most important thing is to analyze your costs carefully. Business costs can add up within a short time, and you need to fine-tune them to determine where your money goes. Fine-tuning your expenses is crucial in guiding you in making financial projections.
By predicting your income and expenditure, your business will be well prepared to address possible obstacles.
Incorporating good invoicing practices in your day-to-day accounting procedures is crucial. Avoid delaying in sending out invoices and send them out as soon as you deliver goods or services. The shorter your payment terms, the less likely it is for payments to be forgotten or lost.
Have you ever considered selling your invoices? This approach is also known as invoice discounting or factoring. It’s a flexible and fast form of B2B business funding.
Invoices are company assets and come in handy as a solution when payment terms are 15, 30, or 60 days. Instead of waiting for the client to make payment, the company sells the invoice to a factoring company for upfront payment. When the client makes payment, the business refunds the factoring company.
Keep Track of Your Accounts
One mistake that you can make with your business finances is to mix business accounts with private ones. If you use the same account for business as personal expenditure, you’ll most likely be unable to draw a line. The mix up will eventually lead to tax headaches and unexplained losses.
Sometimes, you may use personal money to loan your business projects. If you consider these as loans to the business, remember to keep accurate records so that you can pay off the amount from profits made.
Keeping separate accounts for business and personal funds will give you an easy time later when selling the company. Separate accounts also make tax calculations more manageable to handle annually. Although it’s not mandatory to keep separate accounts, it’s a wise approach to small business financial management.
In the same way that you lend money to your business and pay yourself back, you owe yourself a salary. It can be tempting to put everything that comes into the company into the daily operations. In most cases, you’ll argue that the extra earnings will go a long way in boosting the business.
While this is true, remember that as the owner of the business, you deserve to be paid as much as your employees. Avoid the temptation to overlook your role and contribution in the enterprise. You need to compensate yourself for the time and human resource you invest in the running of the business.
A professor, Alexander Lowry, notes that most small business owners don’t take paying themselves seriously. Having personal finances will ensure that business finances remain in good shape.
While considering how much to pay yourself, remain frugal. Avoid taking all the benefits even if you can afford to do so. Set your salary as low as possible and only take the government-mandated benefits. You can save the rest of the amount, which will come in handy in future lean months.
Identify the Bigger Business Issues
Apart from the daily business costs, there are more significant expenses to be kept in check. As a business expands, it will incur other costs like legal fees. Legal representation does not come cheap, and you need to make your expectations clear as you hire a lawyer.
Other costs associated with business expansion are marketing and public relations expenses. Business expansion should be approached wisely and steadily. Avoid investing large amounts of money at a go when growing from one level to the next.
Develop a marketing strategy that is focused and intentional. Don’t go into marketing blindly as not all plans might apply in your business situation. One marketing mistake is going big into sign writing, business cards, and marketing materials while your business is still young.
For example, you may feel tempted to buy business premises instead of renting. This goes together with buying large machinery that your business might not be prepared for as yet. If you push large amounts of money into the firm too quickly, the results might be drastic.
However, if you decide that you need to buy equipment, don’t let it sit idle. It can be a source of income for the business especially when cash is tight.
Get Your Financial Documents Right
It’s almost impossible to attain success in small business financial management without proper financial documents. These are documents that track your profitability and control the financial condition of your business. Key financial statements that you need to highlight are the following:
This is also known as the income or earnings statement. It’s a summary of your business income and expenses and indicates the corresponding loss or profit.
Statement of Cash Flows
The statement is a report of the net increase or decrease in revenue or expenses during the statement period. Note that the amount is different from the profit or loss reported during the period. The statement is also a summary of other cash sources tapped during the period, and the expenses incurred.
The Balance Sheet
The Balance Sheet is also referred to as the Statement of Financial Condition. It provides a summary of the business assets and liabilities. The figures are reported on the last day of the profit period.
The Balance Sheet also shows the source of the owner’s equity. You shouldn’t confuse the balance sheet with your business’s market value. Even though it reports the assets and liabilities of the company, it’s not a reflection of the profit performance over the years.
The above financial documents won’t be of value to your business if you can’t read and interpret them. A lack of their understanding will present serious disadvantages in making sound financial decisions. Remember that if the information on your documents is wrong, your business will suffer.
An accountant can help design a reliable accounting system and will also offer valuable insights into financial management.
Make the Most of Your Business Assets
Your business assets have a bearing on your financial status to an extent. It’s only through managing them that you can maximize their use. Here is how you can use the assets to increase business profitability.
Match your assets to your annual sales revenue. The value of your total assets determines the capital you need to raise. Raising money comes with a cost, yet the more the assets you have, the more capital you will need to raise.
To keep your finances in check, consider downsizing your assets if doing so won’t hurt your sales.
Avoid securing debt and equity capital before doing your research. In as much as you need to raise money for your business, don’t rush for it. You should carefully examine the total value of the cost of the capital.
Determine the interference various sources of the capital will have on your business. Some schools of thought argue that you need a loan to grow your business. Be sure to make this decision carefully while working with a reputable lender.
If your business makes profits, it generates taxable income. A small business is among the business entities that don’t have to pay income tax. Instead, their owners include the taxable business income in their individual income tax returns.
They are known as pass-through tax entities, with their profit being taxed only once. This happens as the owner files their tax returns.
If the assets of your business are to work for you, you need to protect them from fraudulent use. Ensure you enforce controls that minimize theft threats and fraud.
Negotiate with Vendors
Your clients will sometimes negotiate with you for payment, asking for flexibility in payment terms. You can do the same with your vendors. Digging a little deeper in your negotiations can land you a financially favorable deal.
Before you sign the contract, examine purchase terms like penalties attracted by late payments. Check the grace period and determine how well it resonates with the financial status of your business. Sometimes, an extension of the payment period can save you a considerable discount.
Vendors value their clients, and most of them are strongly inclined to help finance purchases. Depending on your vendor-client relationship, some will be more flexible in their arrangements than others. Vendors may have been unwilling to negotiate before, but exercising persistence will pay off.
Paying on Time
If your vendors are kind enough to extend you flexibility in your payment options, be diligent in payment. Just like you’re keen on paying personal bills, business bills should be given the same priority. A late payment to your vendors can attract penalties and diminish trust between the parties.
Other bills that must be paid promptly are loan repayments and credit card bills. Those little fees in the form of penalties eventually add up and can be costly to your business. Monthly reminders or automatic check-off systems can help in keeping up with your payments.
Remember that the profit-loss margin for your business is minimal. If you don’t keep up with payments, it could mean the difference between succeeding and failing.
Small Business Financial Management – Final Thoughts
The more you understand the dynamics of your business finances, the better placed you’ll be to succeed. You’ll not be able to make smart money management decisions if you don’t track your income and expenditure. This guide will get you started and help you balance.
However, for a more proactive small business financial management approach, you need to learn. Enrolling for a financial management course won’t hurt if you can’t afford to hire a professional bookkeeper. Learn the basics of running a successful business.
Simple tasks like drafting financial statements and carrying out accounting tasks should be on your fingertips. Being able to manage your finances without relying on external input would be the ideal situation.
In so doing, you remain in touch with the actual financial situation of your business. Despite the level of knowledge you have, stay organized and focused on the best results in money management.
Most importantly, know how to supplement your capital by using business loans. At Dealstruck, we can help with that; just get started here.