The initial years of building a business are all about learning and paving the way for long-term success by overcoming challenges. A vast challenge a small business or a startup often faces during the initial years, and sometimes even after a few years, is the financial management challenges.
Mismanaged finances and cash flow issues are the biggest problems that lead to the shutdown of a business. While some companies fail to chase payments, other companies spend too much. Either way, they are both failing equally. According to recent statistics, more than 65% of small businesses face financial challenges.
But the financial pitfalls are something that you can tackle. All you need to do is have the proper knowledge and the system in place. For this, a business owner has to understand how to manage business finances and why it is crucial for a small business?
This blog will discuss financial management for small businesses and startups and provide crucial tips for managing everyday business finance.
Table of Content
What is Business Financial Management?
Business financial management includes:
- Creating financial statements
- Managing cash flow statement
- Prioritizing financial planning for reaching financial goals for your business by making informed decisions and maintaining the sound financial health of your business
Managing business finance requires business owners to seek sound financial advice regarding accounting and managing cash while considering debt, taxation, and long-term business structure.
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The Importance of Managing Business Finance For a Small Business Owner
- Smooth Business Operations: With proper financial management, you can ensure that the business operations are carried out smoothly.
- Improves Value & Goodwill: Financial management not only increases the profitability of the business, but also improves the overall value and goodwill of the business.
- Better Tax Planning: Proper financial management helps at the time of paying taxes. If you do not have tax planning as a part of your financial management, you can lose quite a bit of money.
- Provide Economic Stability: Good financial practices in the business will provide economic stability during difficult times. With that stability, the company can easily sustain an economic downturn.
- Helps in Future Plans: Financial management and planning allow a business owner to be more confident and venturesome. It helps the company expand in the future.
- Improves Financial Health: Good financial management will help you define long-term goals and achieve them. It can help your business maintain good financial health throughout its life.
7 Key Tips to Manage Your Business Finances
These are some of the most valuable tips for small business owners to manage their finances successfully.
Keep Your Business & Personal Accounts Separate
Your small business finance must be kept away from your personal finance. It helps in avoiding confusion during record keeping. If you have a separate bank account for your business, it offers you a clear understanding of the cash that is available for business.
- You should not pay your business expenses through personal credit cards or bank accounts.
- You should not transfer the money from your bank account to your personal account.
- Have a business savings account and business chequing account for putting money aside and receiving payments, respectively.
Keeping a clear distinction between your personal and business accounts helps you keep your finances secure without losing out on personal finance due to business difficulties and vice versa.
Digitize Account & Finance Management
In this era of technology, it is easier to sort things out than ever before. There is an app for everything, and storage is unlimited. Digitizing your documents, accounts, contracts and every other business document is probably the best way not to feel like you are swamped with unending paperwork all the time when you should be working.
- If you decide to keep hard copies, keep separate files or compartments and give them clear tags. You can store most of your essential paperwork online.
- Accounting and bookkeeping records can be stored on accounting software.
- Bank records can be stored in a mobile banking app.
- You can save all your business contacts in a note-taking app or Cloud.
- You can save trademark applications and patents, permits, and licenses on Cloud.
- Employee records and essential information can be handled by human resource software.
- You even have apps like InvoiceOwl to manage your daily invoices and payments.
Take Advice from Professionals
Having the right set of financial professionals providing you advice will help you stay on track. They will give you the information you need to know to manage your finances better. It will allow you to take some load off your mind and focus on more immediate tasks.
- Consulting with a CPA helps you sort out financial strategy, business insurance, and financial reports. They will help you get your business’s financial standing clearly.
- These professionals can create profit and loss reports, balance sheets, and statements of cash flow.
- They can keep you up to date with expenses and any profit or loss incurred during the financial year.
- Work closely with tax professionals to file tax returns and meet your tax obligations, so you can get help in saving some money.
Frugality Pays in Business
Being frugal in business means only spending on what is essential so that it allows you to be efficient. Your business requires you to have a fine balance between cost-cutting and making intelligent financial decisions.
Being frugal doesn’t mean you stop paying your bills or do not spend on necessary expenses. It simply means you will have to think clearly before making big purchases or decisions that may affect the financial health of your business.
Don’t just be frugal in paying others, be frugal while also paying yourself a salary. As a business owner, you already know how difficult it is to earn that money. Being frugal about it only shows how much you value. Eventually, frugality pays in business and life because a penny saved is a penny earned.
Manage Debt Properly
Debt is a fact of life, not just for us individuals but for businesses as well. Debt can be in any form: credit cards, small business loans, startup funding, commercial mortgage payments, or loans for capital equipment or property or equipment lease. There are hardly any entirely debt-free businesses. So, a debt-free business in today’s world is a myth.
Borrowing is completely fine. You need to keep track of the costs associated with the borrowing. The capital amount, the interest amount, and several hidden charges can cost you a lot of money.
You should have a clear plan to resolve the debt. The plan will require you to look into the debt closely. Assessment of debt regularly is necessary. Get an accountant to help you wherever you think you need help.
Study Your Cash Flow Well
The biggest challenge faced by a small business is often the cash flow. Getting accurate inflow and outflow charts for your business will present you with valuable insights into your business’s cash flow. You can use accounting software to generate a cash flow chart. You can get an accountant to help you understand your business cash flow better.
Studying your cash flow chart helps you identify a pattern in your business. These patterns help you understand where you are going wrong in business. Studying a cash flow regularly allows you to control your finances and control any expenses where necessary.
- Cash flow charts can help you identify the potential risk of cash flow problems in the business.
- A cash flow helps you to restructure certain aspects of your business to avoid any financial dips.
- While studying the cash flow, it is the size of the difference between the inflow and outflow that matters the most.
- You can make adjustments in cash flow by better aligning your inflows with outflows.
- Make a cash flow forecast. It helps you plan for more significant purchases and advancements that require a more considerable amount of cash.
- It shows you the amount of enough cash that you require to keep your business going.
Pay Yourself First
Paying yourself doesn’t mean you have to suck out all the profit from the business. But paying yourself is an excellent exercise in setting aside money for the future or testing your business’s profitability.
In a way, paying yourself only increases more savings for the business. Banks and financial companies often look at business owners who pay themselves as highly committed. Paying yourself has several benefits. Some of those benefits are secrets that only your accountant will share with you.
- Paying yourself helps you create a safety net for unexpected situations or expenses.
- When you pay yourself, you can try and work as an emergency fund for yourself and your business.
- It can help you set up a good financial habit and build towards the future.
- As a small business owner, you can’t overlook your role in the business. It is vital that you keep compensating yourself accordingly.
- You need to remember that you are a part of the business. So you need to compensate yourself as much as others.
How do small businesses organize their finances?
Most small businesses organize finances by creating a separate business account, getting a business credit card or a line of credit for business, using an accounting program, and setting aside money for taxes. These are something you require to get going. Eventually, a small business can employ professionals for handling finance, accounting, and tax responsibilities.
How do you manage business accounts?
To manage small business finances and accounts better, you must pay off the debt in time and pay yourself a regular salary from the earnings. Managing the business account properly also involves:
- Developing a bookkeeping system
- Payroll system
- Creating a business bank account for the transactions
- Evaluating your accounts and accounting methods periodically
What’s the difference between debt financing and equity financing?
Debt financing is related to borrowing money or gathering business funds that you can repay with interest over a certain period. At the same time, equity financing means raising capital for the business by exchanging ownership shares in the entity. Both are popular forms of business financing.
What different types of small business finances are available?
The different finance options available for small businesses are:
- Business credit card
- Cash advance
- Equipment financing
- Business lines of credit
- Small business loan
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You Can Still Get a Grasp on Your Finances
There are a few other everyday tips for money management in addition to the ones mentioned above.
- Track your expenses religiously
- Sort out your modes or receiving payments
- Select a good accounting software
- You must remember always to pay your bills on time
- Place financial management at the heart of your business
The need for managing business finances in small businesses is as much as in any other type of business. It requires the business owner to have the good financial discipline and receive help from professionals wherever needed.
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