One of the hardest tasks that business owners need to ensure is managing business finances. The fact is that you need to know how to manage the financial health of your company. Otherwise, you’ll definitely struggle to generate a profit, manage your resources, plan strategically and pursue your goals with a greater sense of clarity. Even if you have several other aspects of business management in order, neglecting your finances can topple your entire program.
It’s alright if you don’t have much experience managing personal finances, there are certain things that you can do to avoid slipping into bad financial habits. Here’s what you need to consider.
1. Properly Manage the Accounting
Although you can invest in accounting software, it is best that you hire a bookkeeper or outsource the work to ensure that you can keep track of all costs and income. The fact is that managing business debt and expenses requires you to be on top of everything. Otherwise, you will struggle to pay off loans on equipment and other items, and slip into poor money management.
2. Review the Costs
The next tip that you should consider is reviewing your costs. It is in your best interest to keep track of all expenses. You need detailed information to make more focused financial decisions. As costs can quickly add up, you have to stay on top of everything to not overspend or get into debt.
Managing costs allows you to obtain the supplies you need to keep your business running, invest in growth, and increase customer service standards, while ensuring you don’t go over budget.
3. Make Financial Projections
To avoid making serious mistakes in your business finances, and to give yourself the foundation you need to conduct long-term planning, consider making financial projections using all data within reach. The three most vital reports to use are a balance sheet, income statement, and cash-flow statement. These three reports provide the core information necessary for projections.
Additionally, you can use several other forms provided by your accounting software and bookkeeper, like the profit and loss report, aged receivables summary, analyze sales report, and several others to refine your process. By anticipating your future business needs, you will be able to create a budget and address obstacles early on.
Moreover, you can use accounting software to monitor card payments and cash flow. In fact, you should be able to generate a report for a specific time period with just a click of a button. There are plenty of options for setting the period of time you want to focus on.
4. Get the Invoicing Right
Invoicing is one of the most important tasks that you need to get right to better manage your business finances. You must send out invoices as soon as you provide goods or services. There’s no reason for you to wait around. Also, you need to set the payment terms to ensure that payments are made promptly. You don’t want to be in a position to hound your customers to pay you back.
You want to establish a payment system that guarantees instant payments, or payments with a short lag time. You can even set automatic reminders that will reach out to your clients and customers to avoid late payments.
Make sure to clear the account balance as soon as a customer pays to avoid contacting someone who doesn’t owe you anything.
5. Have a Separate Business Bank Account
To avoid many troubles, you should have a separate business bank account. It will be used for income, capital, equities, and expenses. The worst mistake that you can make is mixing business money with personal finances. It is likely to cause tax problems, confusion when accounting for deductibles, mislocation of funds, and unexplained losses. Besides, you would be better able to track your working capital and cash flow when you have a separate business bank account.
6. Manage Your Loans
If you want your business to remain solvent and make the most of your resources, you will also need to keep a close eye on all your personal and business loans. Falling behind on payments, not taking advantage of lower rates when possible, refinancing too often, or taking out too many loans, these can all get you in trouble. Business debt can be a big help when you use it wisely and carefully. Unfortunately, it becomes a weight around your neck and a weapon against your credit when you don’t.
7. Use a Business Credit Card
When it comes to paying off business-related expenses, you need to use a business credit card. However, it should not be used for personal purchases. You don’t want to get confused as to where certain expenditures need to go. You also need to account for these purchases when filing taxes. Plus, there are many perks to using a business credit card that can accrue over time. Always remember that you can save a ton of money when you choose the right card.
8. Pay Yourself First
Running a small business is a full-time job. This is one reason why you should pay yourself first. It doesn’t mean that you’ll gobble up all your profits. But you want to have a regular salary in place so that your needs and the wellbeing of your family are met.
Depending on the level of your current revenue and gross profit, you should set a salary that represents the hard work and innovation you put into your company. It should also provide enough that you aren’t worried about personal and family finances each day. This stress not only makes life more difficult, it makes it harder to focus on your work and the development of your people and your organization.
9. Be Frugal
Since running a small business costs a ton of money, you have to remain frugal. There’s no other way to succeed, at least toward the beginning. Although you might pay yourself, it doesn’t mean that you should use up all the money. You need to save up and ensure that you invest it to diversify your income for long-term security and future opportunities. The money you save now will provide you with greater flexibility later on. It would allow you to weather many storms.
10. Reduce Travel Costs
In addition to the above, you also need to keep an eye on travel expenses. You can’t let them add up. If you notice travel costs going up, you will need to identify the source of the problem and find alternatives to reduce these expenses. If you’ve been flying to a location for business, you might be able to take a train or drive there instead if it’s close enough and economically wise to do so. Similarly, you don’t need to stay in a 5-star hotel or eat out at the finest restaurants every day. It’s the small things that make a huge difference.
11. Keep Legal Fees Under Control
Since legal services cost a ton of money, you need to better manage them to ensure that these fees don’t get out of hand. In order to better manage legal costs, make your expectations clear and opt for a more cost-effective billing option.
You should be able to discuss billing options to find out what works best. Moreover, you should also find out whether it is possible to defer payments until a more opportune time. Legal counsel is important for business owners. You don’t want to neglect it. However, you want to remain aware and engaged with it to ensure you are getting the best value.
12. Be Strategic with Your Marketing Choices
Marketing is such an important part of your business growth plan. It is imperative for building a dedicated customer base and your brand’s identity within the market. Sometimes, if you have the experience, you can handle your own marketing for a while. Be careful, though, as this can eat up a lot of your time, which can cause you to burn out and neglect it.
Other times, contracting with a professional marketing firm is the right choice, as they can put their experience, resources, and creativity to work for you to achieve significant results. It may cost a bit more, but you might make a lot more in return. Investing in a strong marketing plan is one of the best business decisions you can make. Look at all your options and invest in the marketing choices that push your business forward in tangible ways while not breaking the bank.
13. Rent Instead of Purchase
Since it costs a ton of money to buy property or large equipment, it might be better for you to rent or lease.. You should lease equipment to avoid having to pay maintenance costs. Besides, it will also ensure that you don’t overpay for anything and that you only pay when you need to use the equipment.
14. Know When to Get a Loan
There’s no reason for you to wait a long time until you take out a loan. Knowing when to take out a loan allows you to benefit from better terms. In fact, yo’ll be in a better position to negotiate and get the loan amount that you need to keep your business afloat. You should take a loan out when your business finances are in order. It is always best to get financing long before a possible emergency, and use it to strengthen your infrastructure and expand your efforts so you can navigate more difficult times more easily.
15. Sufficient Capital
As a small business owner, you also have to keep an eye on your capital. It should be enough to keep the business running daily and to cover unforeseen expenses.. Generally, you should have capital that covers three to six months’ worth of expenses.
16. Never Spend Prematurely
Lastly, you should think about each expense. Never pay for anything without justifying its cost. Know why you’re thinking about purchasing something. You need to be able to connect it directly to a clear objective or outcome. If you can’t, you should rethink your desires.
Conclusion
Managing your finances is one of the best things you’ll ever do for your business, No matter how many other areas you have in order, without a clear understanding and confident hand on your budget, expenses, spending habits, investments, and cash flow, problems will eventually arise.
Great money managers make better business managers. Finally, don’t hesitate to reach out to a great bookkeeper or bookkeeping service provider to help get your business finances in order.
Sound Accounts helps business owners achieve more with superb bookkeeping services and great advice. Contact us today to learn more.
To learn more about managing your business finances, check out our frequently asked questions below.
FAQ
How can I learn how to manage my business finances?
There are several resources to tap into. Start by teaming up with a great bookkeeper or accountant. Check out several excellent books on money management for business owners. Take some online classes from places like Coursera and Udemy, and partner with a mentor with considerable experience in this area.
How can I decrease errors and make the most of my business finances?
Create a clear budget and stick to it.
Keep meticulous records.
Go over your most important financial statements and financial reports each day and keep physical copies of your financial documents on hand in addition to your computer files.
Reconcile all invoices and receipts daily.
Stay on top of your business expenses.
Follow your business plan and your financial plan closely.
Separate your business accounts and personal accounts.
Control business travel expenses.
Create a business savings account as an emergency fund to stay ahead of surprises and unexpected expenses.
Keep detailed business records for everything.
Consider strategic financial partners and angel investors.
Make monthly payments on time.
Consider leasing equipment instead of purchasing.
Keep track of cash flow, profit margin, and business revenue so you can reach your financial goals.
Protect yourself with business insurance.
Know your tax burden and be detailed and on time with tax payments.
Educate yourself on financial management principles.
Talk with your bookkeeper about other ways you can stay ahead and avoid mistakes.
How Long Does It Take For A Small Business To Be Profitable?
It varies widely from business to business. It’s common, though, for many businesses to turn a profit after the second or third year. Your experience will be unique to you, though.
