Often, your small business is successful because of your expertise in making your product or providing your service. Unfortunately, you might not be an expert at the other important parts of running a business, such as managing finances. If you don’t have a lot of experience with managing business finances, it can be a challenge, but it’s also crucial to the survival of your business. Here’s how to establish responsible financial habits that put your business on the road to success.
Tips for managing small business finances
Here are a few things you should do as a small business owner to stay on top of your finances.
1. Pay yourself.
If you’re running a small or midsize business (SMB), it can be tempting to put everything into your day-to-day operations. After all, that extra capital can often go a long way in helping your business grow. Alexander Lowry, a professor and director of the Master of Science in Financial Analysis Program at Gordon College, said small business owners shouldn’t overlook their own role in the company and should compensate themselves accordingly. You want to ensure that your business and personal finances are in good shape.
“Many SMB owners, especially at the outset, neglect to pay themselves,” he said. “They [believe] it’s more important to get the business up and running and pay everyone else. But, if the business doesn’t work out, you won’t have ever paid yourself. Remember, you’re part of the business, and you need to compensate yourself as much as you pay others.”
2. Invest in growth.
It’s important to set aside money and look into growth opportunities, which can allow your business to thrive and move in a healthy financial direction. Edgar Collado, chief operating officer at Tobias Financial Advisors, said 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 that they are willing to invest in the future,” he said. “Customers will appreciate the increased level of service. Employees will appreciate that you are investing in the company and in their careers. And ultimately, you will create more value for your business than if you were just spending all your profits on personal matters.”
3. Don’t be afraid of loans.
Loans can lead business owners to worry about the financial repercussions of failure. However, without the influx of capital you obtain from loans, you may face substantial challenges when trying to purchase equipment or grow your team. You can also use loan proceeds to boost your cash flow and thus face fewer issues in paying employees and suppliers on time. Plus, the best business loans come with terms and rates that many small business owners can easily accommodate.
4. Keep good business credit.
As your company grows, you may want to purchase more commercial real estate, acquire additional insurance policies and take out more loans to facilitate these pursuits. With poor business credit, getting approval for these transactions and acquisitions may be more difficult.
To keep good credit, pay off all your debt funding as soon as possible. For example, don’t let your business credit cards run a balance for more than a few weeks. Likewise, don’t take out loans with interest rates that you can’t afford. Only seek funding that you can quickly and easily repay.
5. Have a good billing strategy.
Every business owner has a client that is consistently late on their invoices and payments. Managing small business finances also means managing cash flow to ensure your business is operating at a healthy level on a day-to-day basis. If you’re struggling to collect from certain customers or clients, it may be time to get creative with how you bill them.
“Too much cash tied up in unpaid invoices can lead to cash flow problems, 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, instead of badgering them with repeated invoicing and phone calls, try a different approach. Change the payment terms to ‘2/10 Net 30.’ This means if the customer pays the invoice within 10 days, they receive a 2% discount off the total bill. If not, the terms are full payment due in 30 days.”
6. Spread out tax payments.
If you have trouble saving for your quarterly estimated tax payments, make it a monthly payment instead, said Michele Etzel, owner of Bayside Accounting Services. That way, you can treat tax payments like any other monthly operating expense. You can also use the best online tax software platforms to streamline your tax payments.
7. Monitor your books.
This is an obvious practice, but it’s a very important one. Do your best to set aside time each day or month to review and monitor your books, even if you’re working with a bookkeeper. This will allow you to become more familiar with the finances of your business and provide you with a window into potential financial crime.
“Do not neglect bank reconciliations and spending some time each month on reviewing outstanding invoices,” said Terence Channon, principal for NewLead LLC. “Failing to do this, especially if a bookkeeper is involved, opens up the business to wasteful spending or even embezzlement.”
8. Focus on both expenditures and ROI.
Measuring expenditures and return on investment (ROI) can give you a clear picture of which investments make sense and which may not be worth continuing. Deborah Sweeney, CEO of MyCorporation, said small business owners should be mindful of where they spend their money.
“Focus on the ROI that comes with each of your expenditures,” she said. “Not doing this means that you can lose money on irrelevant or bad spending bets. Know where you are spending your hard-earned dollars and how that investment is paying off. If it isn’t paying off, cut back and spend a bit more on the initiatives that do work for you and your business.”
9. Set up good financial habits.
Establishing internal financial protocols, even if it’s as simple as dedicating a set time to reviewing and updating financial information, can go a long way in protecting the financial health of your business. Keeping up with your finances can help you mitigate fraud or risk.
“As a small business, we are often strapped for time, money and have vastly inferior technological capabilities, but it shouldn’t prevent any small business owner from implementing some sort of internal control,” Collado said. “This is especially important if you have employees. Weak internal controls can lead to employee fraud or theft, and can potentially get you into legal problems if you or an employee are not abiding by certain laws.”
10. Plan ahead.
There will always be business issues that need to be addressed today, but when it comes to your finances, you need to plan for the future. “If you’re not looking five to 10 years ahead, you are behind the competition,” said Tina Gosnold.
Source: BusinessNewsDaily
