The initial years of building a new business are all about learning and paving the way for success by overcoming challenges. A vast challenge that a small business or a startup often faces during the initial years, and sometimes even after a few years, is managing finances.
Mismanaged finances and cash flow issues are the biggest problems that lead to the shutdown of a new business. While many business 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 person has to understand how to manage business finances and why it is crucial for a small business?
This blog will discuss managing finances for small enterprises 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 short term 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 from a tax advisor or certified public accountant regarding accounting and managing cash while considering debt funding, taxation, and perpetual business structure. It will help you get rid of legal trouble.
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The Importance of Managing Business Finance For a Small Business Owner
- Smooth Business Operations: For managing small business finances, you can ensure that the business operations are carried out smoothly.
- Improves Value & Goodwill: Financial management not only increases the net profit margin 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 management, you can lose quite a bit of money.
- Provide Economic Stability: Good financial practices in the business will help to provide information on economic stability during difficult times. With that stability, the company can easily sustain an economic downturn.
- Helps in Future Plans: Managing and planning finances allow a business person to be more confident and venturesome. It helps the company expand in the future.
- Improves Financial Health: By properly managing your business finances, it will help you define long-term goals and achieve them. It can help your business to regularly maintain good health of your finances 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 finances must be kept away from your personal finances. 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-related 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.
It’s better to keep personal finances and business finances separately. It 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 financial 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 with advice will help you stay on track. They will give you the valuable information you need to know to manage your small business finances better. It will allow you to take some load off your mind and focus on more immediate accounting 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 a profit and loss statement, a perfect balance sheet, and even bank statements.
- They can keep you up to date with unexpected expenses and any net profit margin 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 for your unpaid invoices or do not spend on unexpected 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 person, 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: business credit cards, small business loans, startup funding, commercial mortgage payments, or bank 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 rate, and several hidden charges can cost you a lot of money.
You should have a clear financial plan to resolve the debt. The plan will require you to look into the debt closely. Assessment of debt on a day-to-day basis 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 valuable assets. 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 own business revenue flow chart helps you identify a pattern in your business. These patterns help you understand where you are going wrong in business. Studying a flow of your business revenues regularly allows you to control your finances and control any expenses where necessary.
- Cash flow charts can help you identify the potential risks of money problems in the business.
- It helps you to restructure certain aspects of your business to avoid any financial dips.
- While studying the money flow, it is the size of the difference between the inflow and outflow that matters the most.
- It helps you improve your credit rating.
- You can make adjustments inflow of your cash by better aligning your inflows with outflows.
- Make an annual revenue forecast. It helps you plan for more significant purchases and advancements that require a more considerable amount of cash to improve the business line.
- It shows you the certain amount that you require to keep your business running smoothly.
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 to save money for the future or test 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 expenses or operating 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-scale enterprise 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-scale 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 self-employment taxes. These are something you require to get going. Eventually, a small business can employ professionals for handling finance, tax, and accounting tasks
How do you manage business accounts?
For managing small business finances and accounts better, you must pay off the debt in a specific period and pay yourself a regular salary from the earnings. Managing the business account properly also involves:
- Developing a bookkeeping system
- Payroll processing system
- Creating a separate business bank account for the business 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 rates over a certain accounting period. On the other hand, equity financing means raising capital for the business by exchanging ownership shares in the entity. Both are popular forms of business’s short-term financing.
What different types of small business finances are available?
The different finance options available for small-scale businesses are:
- Business credit card
- Cash advance
- Equipment financing
- A business line 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 business-related operating expenses religiously
- Sort out your modes or receiving payments
- Select a good accounting software
- You must remember always to pay your specific tax bill on time
- Place managing your finances at the heart of your business
The need for managing business finances in businesses is as much as in any other type of business. It requires the business person to have the good financial discipline and receive help from professionals wherever needed.
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