Every company wants to reach financial stability. You want your company to stay in the green, but stability takes more than profit. For example, is your business stable if your accounts payable team struggles every month to get payments to vendors? Is it stable if your accounts receivable team has difficulty invoicing on time?
Stability takes setting up an efficient plan for your business’s financial operations. You’ll find that automation, the right projections, and other similar processes make your economic efficiency much easier to reach.
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1. Develop reasonable financial projections.
Especially when you’re running a startup, it’s essential to focus on setting up reasonable projections. Although startup CEOs would like to see an early profit, most small businesses shouldn’t expect to see a profit until three to four years in. Even then, only 40 percent of startups see a profit at all. The odds are often stacked against startups, as 90 percent of them fail, with 10 percent failing within the first year.
While working with a financial professional, you should develop financial projections often. Ideally, you should retool your forecasts monthly.
Still, some financial advisors suggest having this meeting weekly during your business’s first years until you reach a point where you’re more financially stable.
2. Automate your B2B payments.
Businesses need the help of other companies. From vendors to contractors to utilities, you’ll need the support of other companies and individuals to keep your business running monthly.
This monthly cycle means your accounts payable team has to focus at month’s end on ensuring business relationships are solid. One missed payment to a business that supports your company, and you may struggle to stay afloat the following month without them. And, when you miss those payments, there’s a possibility that you erode trust with your vendors and business partners. Once that trust has been damaged, it can be hard to repair.
Automating B2B payments eliminates the chance of user error while also making your accounts payable team’s month-end close easier. Goldman Sachs estimates that automation could save your company 70 to 80 percent of the time they’d typically be using to ensure that payments are processed.
As your company grows, you’ll likely be working with more outside supporters than when you first began. So although you may feel like automating B2B payments isn’t saving you much time now, you’ll be grateful you did when your company expands later.
3. Build your cash reserve.
Companies need to factor in an uncertain landscape. Although you may feel you understand your industry, you can’t predict the future. Your industry may change over a few years due to unforeseen events, like the introduction of groundbreaking technology or a recession.
Industry changes are part of the ballgame when you’re running a business and strategy is essential. It’s your responsibility to ensure these changes don’t affect the future of your business and the livelihoods of the people with whom you work.
With these events may come a change in your profits, which may be positive or negative. If the consequences aren’t beneficial to your income, you may find your company will go under quickly. It’s difficult to predict your industry’s appearance in a year or ten, but that doesn’t mean you can’t prepare for income fluctuations. Whether your business is experiencing high-income months or not, you should try to build up your cash reserve every month.
As an individual may do with a personal savings account, you need a cash reserve for a rainy day. So as you prepare your financial projections, work with your accountant to find a number that you should aim to keep in reserve. To build this cash reserve, set aside a percentage of your monthly income every month – acting as if that money never existed. When you do this, your cash reserve grows organically and will be there on that rainy day when you need it.
Ideally, you should have three to six months of expenses saved.
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4. Automate payments due to your business.
In addition to automating external payments, you should also automate payments coming in.
If you have standard contracts where you know how much you should earn each month from your vendors and partners, automation can make the month-end close much easier for your accounts receivable team. With automation, your team’s not having to chase invoices and track down payments which are rightfully yours for services rendered or products purchased.
Naturally, you want to automate this process to ensure you never miss a payment from a customer, but automation goes further than just ensuring that you’re getting paid.
When you automate payments to your company, you’ll find those projections meetings are more streamlined. You’ll know how much money you’ll get every month long before the month-end closes. If you know how much to expect coming in, you’ll better be able to budget. Many startups find themselves in the red; having a full picture of your income can keep your company above water.
5. Manage your assets all in one place.
While you want a full picture of your income, you also want a complete overview of your financial situation. That means always knowing the value of your physical assets, digital assets, investments, and anything else in your company’s financial portfolio.
Unfortunately, tracking all that information can become time-consuming, and it’s easy for a piece of the puzzle to go missing. Financial tracking apps can ensure that you have all those assets in one place. With the apps providing you with all your financial information in your profile, you won’t have to worry about what’s missing or go searching for documents buried in some forgotten file cabinet.
When businesses first start, they often make the mistake of making a financial plan based on their current size. But as a company begins to expand, it can get bogged down by time-consuming processes that just weren’t built to scale.
So whether you’re a new startup CEO or have been around in your industry for decades, you need to ensure that the financial plan you create is efficient.
Your future finance team will thank you!