Managing The Finances In a Small Business
The aim of every business, big or small, is to make a profit. In those early days, when your small business is only just about breaking even, it might seem as though the day you start making a consistent profit is the day that your worries will be over. In fact though that’s exactly when you have to start thinking seriously about what you’re doing with your money.
Looking after your profits effectively is just as much a part of running a business as keeping an eye on overheads, raising funding, and budgeting for operating costs. It’s not just about making money, it’s also about what you do with the money you have. How businesses manage their finances can be the crucial factor in deciding whether they sink or swim.
Keep business and personal finances separate
Time and again this is the one piece of advice that experts and experienced business professionals repeatedly give out. It might seem obvious, but it’s also a rule that is easy to break unless you’re vigilant and strict about it. Maintain separate budgets, do separate accounting, and never bail your business out by using your personal savings. At the same time, don’t use business credit cards or accounts for your personal use, or vice versa.
Mixing up your business and personal finances can lead to tax difficulties, accounting confusion and worse, so don’t do it. Look after your own finances as diligently as your business budgeting. And if you’re running a business at home with everything going through your personal account, stop and set up a separate business account right now.
Have experts you can call on
Just because you’re a whizz at business it doesn’t mean that you’re an expert in every area relating to it. Being able to fulfil your role effectively is dependent on having the right advisors around you, either as full-time employees or professionals whose services you can rely on. A good business lawyer, an accountant and a tax advisor should be your starting three. The financial advice services provided by major companies like Goldstone Financial Group can also be massively helpful.
Learn some basic accounting
Even with professional advice and the services of a full-time accountant, it’s helpful for you to know the basics of accounting as well. Take an introductory course to familiarize yourself with the terms used and how the flow of money works. That will help you to understand and manage your business better and will allow you to make informed financial decisions.
You can also use accounting software, but this is no substitute for being able to look at the books and see what’s going on yourself. Keep track of your expenses and regularly review your business costs. Check where you can make savings and identify those factors that can most affect your cash flow. How can these be best managed?
Plan for the future of your small business
You should always try to keep at least 6-12 months’ worth of business expenses in liquid cash reserves to ensure business continuity if anything unexpected happens. At the same time, make sure your insurance plans are up to date and that pensions, taxes, etc., are all paid regularly. This is to avoid suddenly being saddled with a large unpaid bill that you haven’t budgeted for.
Get expert financial projections for your business and build these into your long-term business plan. Be prepared for rough patches ahead and have a strategy, as well as the financial resources, to deal with them. As a start-up you can get used to surviving from hand to mouth, but once your business is up and running it’s essential to have some backup funds always to hand.
Don’t put all your eggs in one basket
It may seem like a good idea to plough all of your profits back into the business, but in fact that is an extremely risky strategy. Experts recommend investing excess capital separately with a very different risk profile. In investment terms, this is akin to maintaining a diverse portfolio, which is one of the basic principles of risk management.
Pay yourself before you put any money back as well, and pay yourself enough to save 10-20% of your income for the future. To some extent this also falls under keeping your finances separate. Make sure that your business is not your only asset.
Be diligent and punctual
Good habits can go a long way towards keeping your finances straight. Pay your bills and your taxes on time. Invoice clients promptly, and be consistent about chasing up unpaid invoices. Manage the credit you extend to clients and customers and make sure you’re getting the best deal on things like utilities. Be frugal where you can, but spend wisely where it counts.
Financial management is largely a matter of disciplined behavior, common sense and good advice. Look after your money and it will look after you.