There are two things that are essential for keeping your small business financially healthy. These are education and organization. Only when you properly manage your finances can you expect to maintain stability and ensure that your company continues to succeed.
As you already know, managing finances for your small business is no easy task. Although you might have something unique to offer to your customers, you still need to know how to manage your resources to protect what you’ve built and enable yourself to build even more. Plus, when you aren’t paying close attention to the numbers, you will encounter a great many issues that could damage your business and your reputation.
Even if you don’t have much experience in financial management, you can learn to become a better financial manager. Here are 6 tips for managing your financials as a small business owner.
Types of Business Finances
One of the most important things that you need to understand is that business finances are not only about your earnings. They also involve where you get money and how you spend it. There are two categories available to business owners when it comes to obtaining funding.
Equity Funding
Equity funding is a type of business finance that does not require repayment if the business fails. But, you will need to provide the funders with a seat at the decision-making table and a piece of the profit, or equity share. Some examples of equity funding include equity crowding, angel investors, and venture capitalists.
Debt Funding
Unlike equity funding, which does not require you to make the repayment in case your business fails, debt funding must be repaid. In fact, you would have to repay the loan with added interest.
The reason why debt financing is a popular option among small businesses is that it provides access to the capital immediately. This means that you would not need to wait for months or even weeks to receive your money.
Some of your debt financing options include business credit cards, business credit lines, merchant cash advances, government loans, and bank loans. You will have to repay each of these even if the business fails.
Importance of Managing Business Financials
Before we cover how you can manage financials for your small business, you need to know why there is even a need to manage business financials. If you want to create a stable financial future for your company, it starts with smart money management. There is nothing more risky, costly, and terrifying than not knowing about the direction your organization is headed in. And leaving your finances to chance is the fastest way to put your company at risk. Take your finances seriously and put together a plan that makes the most of your resources so you can build the future you want.
Top Tips for Managing Finances for Small Businesses
These key steps will help you ensure a sound financial future for yourself and your organization.
1. Pay Yourself
When it comes to running a business, you might end up putting everything into daily operations. You might think that the extra capital would help the business grow. However, it could not be further from the truth. It is crucial that you understand the role you play as a small business owner and compensate yourself accordingly. It is the only way that you will keep both your personal and business finances in excellent shape.
The fact is that it is quite common for small business owners to neglect to pay themselves when they start a new venture. But, it is a habit that will prove costly in the long run. Only when you pay yourself, will you be able to keep your business running successfully. You have to pay yourself, as the money you save up can later be used as a buffer during difficult times if the need arises. Keep in mind that you are a part of the business, the very core of your company’s vision, and must be compensated for your contributions.
2. Invest in Growth
The next financial management tip that small business owners need to consider is investing in growth. On top of paying yourself, you also have to set some money aside and consider each growth opportunity that comes your way. It will allow your company to thrive and move confidently in new directions. Keep an eye on the market and cash in on the opportunities that check out.
Businesses that continue to innovate will attract investors and employees alike. Your customers will appreciate an improvement in service and your efforts to expand your products and services. As for your team, they’ll appreciate the fact that you’re investing in their careers and the infrastructure of your company. You’ll be able to create more value for everyone involved.
3. Take Advantage of Loans
Loans are there for a reason. Every successful business owner knows how to obtain loans and use the money for strategic spending. Even though you might find the idea of loans unnerving, there is no need for you to worry. If you have a solid plan, you just need funding to back it. Instead of focusing on the financial repercussions of obtaining a loan, you have to think about what you can do with the money. You should be able to use the loan for boosting cash flow, financing your loss statement, and making decisions that you would otherwise be unable to make.
The loan will help put your business in a better position to implement new strategies, create a bigger budget, and make informed decisions. Besides, loan proceeds can be used for paying suppliers on time and benefitting from cash discounts. There are plenty of reasons for you to get a loan. So, don’t overlook all the possibilities that borrowed money can offer. Just be diligent and consistent in paying it off.
4. Maintain strong Business Credit
If there is one tip that small business owners must consider, it’s that you should always maintain good business credit. As your company expands, you will have to take on more loans for facilitating the acquisition of new equipment and expansion. However, poor business credit will get in the way and prevent you from obtaining a loan at the right rate. Instead, you might end up having to spend more on interest and struggle to pay back what you owe.
When you have good credit, you will have an easier time paying off the loan. It is important that you pay all your credit card expenses on time. Go through all your payments and expenditures as well as your cash flow statement to ensure you don’t make any mistakes that take a toll on your credit score.
5. Establish an Effective Billing Strategy
The next tip you need to consider is creating a good billing strategy. Every business has some clients that are always late on invoices. In order to manage your small business financials, you also have to focus on cash flow.
Make sure to go through your balance sheets and accounting software to analyze all financial records and find out which customers, partners or vendors are taking longer to pay. You might need to get creative to ensure that you are able to collect from certain clients.
Unpaid invoices can cause cash flow problems. This is why you have to create a billing strategy that allows you to improve the way you issue and collect payments . For instance, you might need to offer discounts to customers to encourage them to make payments on time or create an auto-pay program to ensure payments.
6. Spread out Tax Payments
Lastly, you might want to spread out your tax payments. If you tend to struggle with making quarterly tax payments, you could opt for monthly payments instead. It will allow you to treat the tax payments as a monthly operating expense and ensure that you never miss a single one.
Conclusion
By understanding how to manage your small business finances, you can prevent financial failure and keep your business not only solvent but growing. Staying organized and creating a strategy for managing your financials will go a long way in helping your company avoid any financial setbacks and continue to innovate to meet the needs of your customers. It might be a good idea to seek the help of a qualified bookkeeping firm to stay on top of your financial plan.
Sound Accounts helps business owners make the most of their finances with detailed bookkeeping and experienced advice. Connect with us today to learn more.
To learn more about managing your small business financials, check out our frequently asked questions and answers below.
FAQ
How do small businesses manage their financials?
In order to manage your small business financials, you have to improve your money habits. Avoid paying for expenses that can be delayed and obtain funding when necessary. Organize your process with excellent accounting software, look for strategic partners, keep a healthy credit score, look for growth opportunities, and partner with a professional bookkeeping service provider to help you keep it all together.
What are some important steps for managing my business financials?
Some steps include:
Maintain Your Books: Set aside time daily for managing your books. It might be best to hire a bookkeeper or outsource the work to an expert.
Focus on Expenses: Measure your expenses to get an idea about whether you should even take on certain expenses or not. Be wary of how you spend money to avoid any mistakes.
Establish Good Financial Habits: Consider setting internal financial protocols to mitigate risk.
Plan Ahead: Budget all your expenses and plan ahead to avoid financial setbacks.
Evaluate Your Finances: Make sure to go through all your finances to ensure you do not make any mistakes.
How do you keep track of small business finances?
Aside from following the advice above, the best way to keep track of your small business finances is to hire a bookkeeper or outsource the work to a bookkeeping service provider.
