Financial management can be difficult for any small business owner. Often, the skills you bring to making your product or providing your service are the reason your small business is successful. If you don't have much experience managing business finances, it can feel like a chore, and you may fall into bad financial habits that will harm your business one day.
This article is intended for business owners who want to learn how to manage their company's finances.
The Importance of Managing Your Company's finances
The most important step for any business owner is education. Understanding the fundamental skills required to run a small business, such as simple accounting tasks, loan applications, and financial statement drafting, allows business owners to create a stable financial future and avoid failure. Organizing yourself, in addition to education, is an important component of good money management.
Key takeaway: managing your company's finances is critical for ensuring a stable financial future and reducing the likelihood of failure.
Small business financial management tips
Here are a few things you should do as a small business owner to keep your finances in order.
1You must pay yourself
When you own a small business, it's easy to get caught up in the day-to-day operations. After all, that extra cash can often help your company grow. Small business owners should not overlook their own role in the company, according to Alexander Lowry, a professor and director of the Master of Science in Financial Analysis program at Gordon College. You want to make sure your personal and business finances are in good shape.
Many small business owners, particularly at the start, fail to pay themselves. They believe that getting the business up and running and paying everyone else is more important. However, if the business fails, you will never have paid yourself. You are a part of the business, and you must compensate yourself in the same way that you compensate others.
2Invest in expansion
Aside from paying yourself, it's critical to save money and look for opportunities for advancement. This can help your company thrive and move in a positive financial direction. Tobias Financial Advisors' chief financial officer, Edgar Collado, believes that business owners should always keep an eye on the future.
A small business that wants to continue to grow, innovate, and attract the best employees should demonstrate a willingness to invest in the future.
The improved level of service will be appreciated by customers. Employees will value your investment in the company and in their careers. And, in the end, you will add more value to your company than if you spent all of your profits on personal expenses.
3Don't be afraid of borrowing money
Loans can be frightening. They can cause anxiety about the financial consequences of failure. However, without the influx of capital provided by loans, you may face significant challenges when attempting to purchase equipment or expand your team. You can also use loan proceeds to increase your cash flow, making it easier to pay employees and suppliers on time.
4Maintain good business credit
As your company expands, you may want to purchase more commercial real estate, obtain additional insurance policies, and obtain additional loans to facilitate all of these endeavors. With poor business credit, it may be more difficult to obtain approval for all of these transactions and acquisitions.
Pay off all debt funding as soon as possible to maintain good credit. For example, don't carry a balance on your business credit cards for more than a few weeks. Similarly, do not take out loans with interest rates you cannot afford. Only seek funding that you can repay quickly and easily.
5Develop an effective billing strategy
Every business owner has a client who is perpetually late with their invoices and payments. Managing small business finances also entails managing cash flow to ensure your company runs smoothly on a daily basis. If you're having trouble collecting from a specific customer or client, it might be time to get creative with how you bill them.
"Having too much cash tied up in unpaid invoices can lead to cash flow problems, which are a leading cause of business failure," said James Stefurak, managing editor of Invoice Factoring Guide.
"If you have a chronic late-paying customer, which we all do, try a different approach instead of badgering them with repeated invoicing and phone calls." Change the terms of payment to '2/10 Net 30.' If the customer pays the invoice within 10 days, they will receive a 2% discount off the total bill. Otherwise, full payment is due in 30 days. "
6Make tax payments in installments
If you're having trouble saving for your quarterly estimated tax payments, consider making them monthly, according to Michele Etzel, owner of Bayside Accounting Services. Tax payments can then be treated as any other monthly operating expense.
7Keep track of your books
This is a simple but crucial practice. Even if you have a bookkeeper, try to set aside time each day or month to review and monitor your books. It will not only help you become more familiar with your company's finances, but it will also provide you with insight into potential financial crime.
"Do not overlook bank reconciliations and spend some time each month reviewing outstanding invoices," said Terence Channon, principal at NewLead LLC. "Failure to do so, especially if a bookkeeper is involved, exposes the business to wasteful spending or even embezzlement."
8Pay attention to both expenditures and ROI
Measuring expenditures and return on investment can provide a clear picture of which investments make sense and which should be abandoned. According to Deborah Sweeney, CEO of MyCorporation, small business owners should be cautious about where they spend their money.
"Pay attention to the ROI( Return On Investment) associated with each of your expenditures," she advised. "If you don't do this, you risk losing money on irrelevant or bad bets." Understand where your money is going and how that investment is paying off. If it isn't paying off, cut back and focus more on the initiatives that do work for you and your company. "
9Establish good financial habits
Establishing internal financial protocols, even if they are as simple as setting aside time to review and update financial information, can go a long way toward protecting your company's financial health. Keeping track of your finances can help you avoid fraud or risk.
"As a small business, we are frequently short on time and money, and we have vastly inferior technological capabilities," Collado explained.
"This is particularly critical if you have employees." Weak internal controls can lead to employee fraud or theft, as well as legal issues if you or an employee do not follow certain laws."
10Plan ahead of time
There will always be business issues that require immediate attention, but when it comes to your finances, you must plan for the future. "You're behind the competition if you're not looking five to ten years ahead," said Tina Gosnold, founder of QuickBooks specialist firm Set Free Bookkeeping.
Put this in your information bank.
To best manage small business finances, pay yourself a salary from your company's earnings, plan ahead, pay off debt on time, and focus on your return on investment.
Different types of business finances
It's important to remember that business finances aren't just about your earnings; they're also about how you spend your money and where you get it. When it comes to funding, you should be aware of the two main funding categories:
Debt funding is a loan that your company repays with interest. You can quickly access capital that you might not be able to get for weeks or even months if you use debt financing. Bank loans, government loans, merchant cash advances, business credit lines, and business credit cards are all forms of debt financing that must be repaid even if your business fails.
Unlike debt financing, equity funding does not require repayment if your business fails. However, you will almost certainly have to give your funders a seat at the table. Equity funding can be provided by venture capitalists, angel investors, or through equity crowdfunding.
You can learn more about the distinction between debt and equity financing by clicking here.
The key takeaway is that debt funding consists of various traditional loans that require interest payments, whereas equity funding involves fewer financial risks but requires more ceding control to third parties.
