Regardless of a business’s size, financial management is the backbone of growth. However, most small businesses find it difficult to manage finances when handling marketing, manufacturing, or providing services with a limited workforce.
Some small businesses have a few team members where the burden is shared. Others have a one-person army juggling all tasks, including finances. Financial management of a business is tricky, especially if you have no prior finance background or knowledge. From minor bookkeeping to avoiding errors in processing payments and maintaining a budget, small business owners often have to do everything themselves.
Financial management is imperative for the success of a small business to make it through difficult economic times and business competition. However, even if you have a stellar business idea, execution and planning are at one end, and keeping your finances in check is at another. This article addresses seven financial tips you can adopt for managing your small business.
- Separate personal and business finances
The best way to manage your finances as a business owner is to keep personal finances separate. It can feel tempting and convenient to mix business and personal budgets, especially when you’re the one managing finances while running the business. The best way out is to get a business credit card which makes it easier to purchase equipment necessary for manufacturing your merchandise, acquiring assets, filing insurance claims, or applying for business loans. In addition to the perks, the monthly credit limit helps maintain business expenses and keeps them separate from personal expenses. A business credit card is also helpful for staying on top of debt payments.
- Create a billing strategy
A billing strategy helps maintain a consistent cash flow. As a business owner, you may encounter clients with late payment issues. You cannot force clients to make timely payments, but you can adopt a billing strategy like the “2/10 Net 30”. With this strategy, you can offer late-paying clients a 2% discount if they make payments within the first ten days of the invoice. This way, your clients pay on time, and your cash flow remains consistent. However, even with such strategies, there is no guarantee that clients will pay on time. You can also check out debt collection services that help collect payments without fretting.
- Learn financial management
Adopting a good billing strategy and getting a business credit card are one side, but teaching yourself about managing finances as a small business owner changes everything. Before you launch a marketing plan or purchase new assets for your business, you must review your budget to ensure you can afford these expenses. Not knowing where to draw the line between expenses and savings comes from inadequate financial acumen. Prepare yourself for financial management by learning about cash flow, business budgeting, and maintaining critical financial statements. Cash flow, income, and equity statements are essential to keep your finances in check and track your assets and liabilities. Understanding financial management is necessary even if you hire someone to overlook your small business’ finances.
- Pay yourself a salary
You must pay a salary like keeping your business and private expenses separate. You are an employee of your business as you may be using manual labor to manufacture products or provide services like marketing or delivering items to the post office. It is wise to invest all your business revenue in your business during the first couple of months. But once you have reached that break-even, start paying yourself a salary. Your salary is a “transfer earning” that you would have earned from working in some other capacity, so pay yourself on time even if you’re running a business. With a salary, you can accumulate savings to keep your expenses away from business matters. Personal savings are necessary for meeting day-to-day needs.
- Business Budgeting
Set a budget for meeting your business expenses or setting aside funds for investment. It is not wise to run down on your savings and have nothing to pour back into the business, especially if you have poor saving habits. A budget helps set aside funds for fixed and variable expenses but prepares you for precautionary expenses. In a volatile economy like today’s, it is crucial to have emergency funds for business and personal use, though separate for both. So, whether you want to buy new machinery for your clothing business or invest in social media marketing, create a budget that helps you stay on track.
- Choose accounting best practices
When studying business financial management, you may have to choose between cash and accrual basis accounting. These are some of the accounting best practices for businesses. Understanding the difference between the two will help you manage costs and revenue better. Cash basis accounting is for managing a business’ cash flow and activity. It records cash flow in and out of business. Accrual basis accounting, on the other hand, helps manage revenue and expenses better, irrespective of cash flow. Accrual basis is better suited for inventory-based businesses, unlike cash, but is relatively complex to understand. Learn about both in depth before deciding which suits your business needs.
- Reduce Costs
Choosing accounting best practices and maintaining a budget is only helpful if you consistently work on cost reduction for your business. There are many strategies for managing costs and upscaling profits as a small business. Cost reduction involves updating accounting practices like using advanced software to control expenses, budgets, and investments. Or through automation of specific business tasks like marketing.
Becoming adept at financial management is a challenge that requires patience. You won’t become financially competent overnight, but once you do, you can budget better and see actual growth for your business.