Your business is less likely to fail if you manage your finances properly.
Plan ahead, pay yourself, maintain good credit, and monitor your books to manage the finances of your business.
Equity funding is not subject to interest charges, but it may be less flexible and give you less control of your business affairs.
This article provides advice to business owners on how to effectively manage the finances of their companies.
Small business owners can find managing finances a difficult task. Your small business’s success is often due to the skills that you use when making products or offering services. You may feel that managing your business finances is a burden and could lead to bad habits.
Table of Contents
The importance of managing business finances
Education is the most important thing that any business owner can do. Understanding the basics of running a small company such as simple accounting, applying for loans or drafting financial reports can help business owners create a secure financial future and prevent failure. Staying organized is an important part of good money management, along with education.
There is nothing scarier, more expensive or more risky than arriving at your accountant’s at the end the year with nine of your 12 last bank statements and a shoebox full of receipts,” said Ryan Watson. It is difficult to overstate how important and beneficial it is to track your financial data throughout the year.
Takeaway: It is crucial to manage your business finances in order to create a financial future that is stable and less likely for your company’s failure.
As a small-business owner, here are some things you can do to keep track of your finances.
1. You can pay yourself
It’s easy when you run a small company to put all your efforts into the day-to-day running of your business. In the end, extra capital can go a very long way to help your business grow. Alexander Lowry is a professor at Gordon College and the director of their master’s program in financial analysis. He says small business owners should not overlook their role within the company, and compensate themselves accordingly. You need to make sure that both your personal and business finances are in order.
He said that many SMB owners neglect to pay their own salaries, especially in the beginning. “They [believe] that it is more important to get their business running than pay others. If the business fails, you will never have paid yourself. You are part of the company and need to pay yourself as much compensation as you do others.
2. Invest in growth
It’s also important to look at growth opportunities and set money aside in addition to paying yourself. Your business can thrive and grow in a positive financial direction. Edgar Collado said that business owners must always look to the future.
He said that a small business who wants to continue growing, innovate, and attract the best staff [should] show that they’re willing to invest in their future. The increased level of customer service will be appreciated by the customers. Your employees will be grateful that you invest in your company and their career. You will ultimately create more value for the business than if all of your profits were spent on personal matters.
3. Do not be afraid to borrow money
Lending can be frightening. You may worry about the financial consequences of failure. You may find it difficult to grow your business or purchase new equipment without the capital that you receive from loans. Loan proceeds can be used to increase your cash flow, allowing you to pay employees and suppliers more quickly.
4. Maintain a good business credit rating
You may need to take on more debt as your business grows. You might also want to buy more commercial property, get more insurance and acquire more loans. It can be difficult to get approval for these acquisitions and transactions if you have poor business credit. Pay off your debts as quickly as you can to maintain good credit. Don’t allow your business credit card to run a debt for longer than a couple of weeks. Don’t borrow money with high interest rates you cannot afford. You should only seek out funding you can easily and quickly repay.
5. Be sure to have a solid billing strategy
Each business has clients who are consistently late with their payments and invoices. Cash flow management is an important part of managing small business finances. This will ensure that your business operates at a healthy rate on a daily basis. You may need to be creative in how you charge certain clients or customers if you are having trouble collecting from them.
James Stefurak is the managing editor of Invoice Factoring Guide. He said that too much cash in unpaid bills can cause cash flow issues, which are a major reason for business failure. If you have a customer who is chronically late paying, as we all do, then try a new approach instead of pestering them with repeated phone calls and invoicing. If the customer pays within 10 days of the invoice, they will receive a discount of 2% on the total bill. The terms will be full payment in 30 days if not.
6. Tax payments can be spread out
Michele Etzel of Bayside Accounting Services said that if you are having trouble saving up for your quarterly estimated taxes, then make them a monthly payment. You can then treat your tax payments as any other monthly expense.
7. Keep track of your books
It is a simple but very important practice. Even if you work with a bookkeeper, try to schedule time every day or month for reviewing and monitoring your books. This will help you become familiar with your company’s finances, and also give you a glimpse into possible financial crimes.
Terence Channon is the principal of NewLead LLC. He said, “Don’t neglect bank reconciliations or spend some time every month reviewing outstanding invoices.” If you fail to follow this advice, particularly if your bookkeeper is involved, it could lead to wasteful expenditure or even theft.
8. Spending is important, but ROI should also be considered
You can get a better idea of which investments are worth pursuing by measuring expenditures and returns on investment. Deborah Sweeney is the CEO of My Corporation and she says small business owners need to be careful with their spending.
She said, “Focus your attention on the ROI associated with each expenditure.” You could lose money if you don’t do this. Spending your hard-earned money wisely is important. You should know how it pays off. “If it’s not paying off, reduce your spending and invest more in initiatives that work for you and the business.”
9. Establish good financial habits
Even if you simply dedicate a set amount of time each week to reviewing and updating financial data, it can be incredibly beneficial for the financial health your business. Keep track of your finances to reduce fraud and risk.
Collado explained that small businesses are often limited by time and money, as well as having inferior technology capabilities. However, this shouldn’t stop them from implementing an internal control. This is particularly important if you employ people. Weak internal control can lead to employee theft or fraud, and you could be in legal trouble if you violate certain laws or your employee does not.
10. Plan ahead
You will always have business concerns that you must address today. But when it comes time to plan your finances for the future, planning is essential. Tina Gosnold is the founder of Set Free Bookkeeping, a QuickBooks specialist firm. She says that if you don’t plan five to ten years in advance, you will be behind your competition.
Takeaway: For the best management of small business finances, you should pay yourself a salary out of your company’s profits, plan ahead, repay debts in a timely fashion and focus on return on investment.
Business finance types
Remember that your business finances are not just about your income – it’s about where and how you spend the money. You should know the two major funding categories when it comes to funding.
A debt funding loan is one that your business repays, with interest. You can access capital quickly through debt financing that you may not have been able to obtain for weeks or months. Debt financing includes bank loans, government loans and merchant cash advances. Business credit lines, business credit cards, and business credit card lines are also forms of debt.
Equity funding is different from debt funding in that it does not require repayment should your business fail. You will have to give your funders access to the decision-making process. Equity funding can be provided by venture capitalists and angel investors, as well as equity crowdfunding.