One of the biggest challenges of a small business is planning and managing finances.
You have to make sure your business is financially stable before you can realize tremendous business growth.
As a small business owner, your top priority is to have a solid and prudent financial management plan in place. And this could make all the difference to your success or downfall.
Those who are running a small business already know that the success of the business not only depends on their consumer base and sales skills, but it also depends greatly on how well they manage their money.
If you aren’t careful you can find yourself strapped for cash in the middle of a financial emergency.
Many small business owners have problems handling a balanced and regular cash flow. So it’s essential that you have a consistent money management plan that helps your business grow and takes the stress off your mind.
The initial days of starting a business are crucial for small business owners. It involves preparing financial goals, creating a practical budget, and tracking the income and the expenses appropriately. Making intelligent investment decisions will guide your business on its road to success.
Here are the top five best financial management strategies for your small business.
Failing to create a business budget and follow it is the top mistake that most small businesses commit. The reason is obvious: They are not sure where and how they will spend their money.
Even if you don’t know all of the specifics of where your money will go, you should still create a budget. A budget serves as a blueprint and is an excellent foundation for your future business.
Your budget will also give you insights into how you will spend your money and the areas where you can improvise. Leave some flexibility in your budget when preparing one for the first time, so it can be a roadmap for you to plot business decisions along the way.
A flexible budget plan will account for all unexpected expenses and help you have better cost control on the business. Using a budgeting application to manage finances enables you to seek new business opportunities and mitigate risks.
When you’re planning finances for your small business, make sure you have room for a healthy cash flow. This will help you meet obligations like paying employees, purchasing raw materials, and building a reserve for investments.
In addition, it will prepare your business for emergencies. Regardless of the assets your business holds, having a smooth liquid cash flow is crucial for you to sustain your business.
You can perform a cash flow analysis to learn exactly how much money is flowing in and out of your business. With this knowledge, you can plan business operations accordingly. Regular financial analysis will tell you how much money you should keep as a reserve to fund for the months you have a cash flow shortage.
Similar to managing your cash flow, you have to perform tax planning as well. You can choose to outsource your tax preparation and planning to financial professionals to decrease your tax liability.
Small businesses tend to self-fund, and most of the time the self-fund of the owner will be the sole capital for the business. The capital may be sourced through their savings.
Such an investment method is called bootstrapping, and it allows you to grow your business organically and ensures that your financial model is stable and viable. But putting all your savings into your business puts you at significant risk.
It is prudent to think of other sources for pooling capital, such as by offering equity, taking a business loan, or offering customer presales. These can create a constant inflow of capital and help in the smooth running of your business.
Be sure to spend wisely and track your spending. Most small businesses lose track of their spending within a week. Similarly, if you have sold products on credit or have offered loans, track them with the help of loan management software and collect them appropriately.
Keep track of all your expenses, or else they will expand into a huge bill that you might not be prepared for. Take the help of accounting tools and other relevant software to track and maintain a record of every transaction.
Also, have a constant cash reserve at hand. A cash reserve is like a savings account for a business. It will help in times of emergencies – and you never know when your business will face such contingencies.
Thus, it is always a good practice to put part of your profits aside to act as a reserve for challenging times.
Risk management is part of your small business’s financial management. Though it is practically impossible to address every single risk that your business faces, you can surely narrow down the list.
Cover the basic risk management protocols such as an insurance plan, crisis management plan, disaster management plan, business continuity plan, and so on. Your small business’s risk management plan should cover the following:
- The best health insurance or life insurance for your workers. This includes compensation coverage for you and your workers.
- Cash flow contingencies in the event of a cyber attack, a disaster, or a death.
- A survival plan in case of theft or loss of business property or fraudulent activities of employees or other stakeholders.
Most of the time you will be the sole proprietor of your small business. Eventually, you may be tempted to combine your personal and business goals. This could mean you are compromising some aspects of your finances for another.
Though you are building your business to make money for yourself and your family, you should never combine the finances of both, as your personal and financial objectives are different.
Set priorities for your personal and business objectives so that you don’t end up hurting both.
Mixing personal and business funds will make it hard to reconcile financial records. It is better to have a separate bank account for your business funds. Having a separate business bank statement will be useful to track the profit margin of your business, reconcile the accounting books, and keep track of your spending habits.
Once your business starts growing and makes a profit, again divide it into two, pay one half for yourself, and keep the other to reinvest in the business to keep it growing. You can also save it in a separate business account for future use.
Learning ways to manage money appropriately is the secret to a successful business.
- Keep your debts low. Be very careful when you borrow money for your business. Borrow only when the cash flow is very low and the business is in a period of growth or expansion. Too much debt for a business can result in a heavy burden. Cut down unwanted costs and consolidate loans to keep the debt margin low.
- Monitor your financial position. Monitor the progress of your business on a daily basis and calculate the amount of liquid cash in the bank, sales level, and stock levels. Also, review the position of your business against its targets set in the business plan.
- Manage loans and make sure consumers pay on time. Businesses run into trouble because of late payments from customers. Loan tracking software can be of great help in monitoring creditors and clearing invoices on time.
- Keep your accounting records up to date. If the records are not current, there is a huge risk of losing money. You will fail to keep up with late payments from customers or will fail to pay your suppliers. Credible record keeping will help track expenses, debts, and creditors.
- Cut down costs. This is one of the golden rules for the success of your small business. Look for ways to cut down overhead costs and improve business revenues. Eliminate unnecessary spending and improve business revenue by offering discounts while doing product promotions.
Preparing a solid financial plan for your small business is the key to long-term success. Your business should be built on solid financial management strategies. This helps you pitch to investors and keeps your business on the right path, anticipating growth and addressing cash flow shortages.
Running a small business is not as easy as it may seem, but with appropriate planning and a solid financial management plan, nothing can stop it from growing and reaching great heights.