Financial management is essential for small businesses. An effective financial strategy helps you make informed decisions, sustains your business, and grows it—a complete guide to small business financial management.
1. Separate Business and Personal Finances
Every entrepreneur embarks on their business journey with a vision. However, in the rush of this new endeavor, many need to pay more attention to separating their finances from their business. But remember, blending these can lead to complications. For instance, you might inadvertently use your savings to offset business expenses if you’re not careful. Such mistakes can complicate tax filings, especially when identifying which expenses qualify for business deductions.
When you mix personal and business funds, you set yourself up for a potential financial muddle. Trying to sift through combined transactions at the end of a financial year to determine which expense was for business and which was personal can be a nightmare. Not to mention, this makes your business look less professional in the eyes of financial institutions.
Action Step: The solution is straightforward. Open a business bank account and make it a practice to use it exclusively for business transactions. When selecting a bank, consider those offering perks such as free checks, no monthly charges, and a high number of transactions. This practice keeps your finances tidy and instills discipline in managing small business finances.
2. Pay Yourself a Fair Salary
Launching and nurturing a business is demanding. Often, business owners prioritize every other expense over their compensation. While it’s commendable to reinvest profits for business growth, completely sidelining personal compensation can be risky. How will you manage your finances if you’re not drawing a regular salary? Remember, your dedication deserves remuneration.
Taking a regular paycheck, even if modest, sets a positive precedent. It covers your bills and helps in building a personal savings cushion. Should the business hit a rough patch, you have a financial fallback, ensuring you don’t dip into the company’s reserves for personal emergencies.
Action Step: Decide on a compensation structure. Ensure consistency, whether a monthly fixed amount or a percentage of the profits. If you need help with how to go about this, seek advice. An accountant or a small business finance expert can guide you on best practices.
3. Uphold Accounting Best Practices
Accounting is the backbone of any business’s financial health. How you account for your revenue and expenses can significantly influence your understanding of business performance. There are chiefly two methods to consider:
Cash Basis Accounting
Here, transactions are recorded when the cash exchange occurs. This means revenue gets recorded when you physically receive the money and expenses when you pay them out. For many business owners, this method is appealing due to its simplicity. However, it might only sometimes capture the full scope of your financial activities, mainly if your business deals with inventory.
Accrual Basis Accounting
This method is more involved. Revenue is recorded when it’s earned (even if the payment has yet to be received), and expenses are billed (not necessarily when paid). It’s a method that paints a more comprehensive picture of small business finances over a given period.
Action Step: Technology is a boon to modern businesses, especially accounting. Invest in reliable accounting software designed for small businesses. Key features include accessibility from multiple devices, robust customer support, seamless integrations with other business tools, and the ability to automate routine tasks. Leveraging such tools simplifies finance for a small business and ensures you’re always on top of your numbers.
4. Improve Your Business Credit Score
Your business credit score is a testament to your financial responsibility. It plays a critical role in many aspects of your business operations, from getting favorable terms with suppliers to influencing the interest rates on business loans.
A robust business credit score is not just a number; it’s a powerful tool in your small business finance toolkit. By maintaining a good score, you position your business as trustworthy and financially sound, which can be a significant advantage in negotiations and when seeking growth opportunities.
Action Step: Begin by securing a free DUNS number via Dun & Bradstreet. This number becomes your business’s financial identity. Ensure you’re using this number when undertaking business credit activity. Furthermore, periodically review your business credit report. Like personal credit, ensuring accuracy and timely payments can significantly boost your business credit score.
5. Manage Business Taxes
Taxes are inevitable. However, managing them effectively can significantly affect your business’s bottom line. An efficient business with its taxes can reinvest more profits, driving growth and stability.
Ensuring you’re setting aside adequate funds for taxes is crucial. This proactive approach helps avoid any last-minute financial crunches. The exact nature and amount of taxes will depend on your business’s legal structure and region.
Action Step: A disciplined approach is critical. Allocate a portion of your revenue regularly for estimated tax payments. Familiarize yourself with the tax deadlines and adhere to them strictly. On-time payments keep you in good stead with tax authorities and reduce the risk of unforeseen penalties that can strain small business finances.
6. Financing Options for Small Businesses
At various stages in a business lifecycle, additional funds might be needed. Whether it’s to tide over a rough patch, make a significant purchase, or capitalize on a new opportunity, external financing becomes crucial. A firm grasp of your small business finances lets you decide when and how much to borrow.
Every business owner should remember that loans are tools, not crutches. They can help bridge gaps, but relying too heavily on borrowed funds can lead to challenges. Still, when used judiciously, external financing can be the catalyst that propels a business to its next growth phase.
Action Step: If you decide borrowing is the right move, approach the process systematically. Keep your financial records in order, ensuring they accurately reflect the state of your business. When contacting lenders, arm yourself with essential documents such as a detailed business plan, up-to-date financial statements, and any required business licenses. A well-prepared application can speed up the lending process and increase your chances of securing favorable terms, aiding in the efficient management of finance for a small business.
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