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6 Tips for Managing Small Business Finances

According to Small Business Statistics, nearly 500,000 new businesses get founded monthly. Of these, around 50% make it to the 5-year mark, while only 30% can survive up to 10 years. Because of their low success rate, owners must make every possible effort to ensure the business can take off. And while several factors may contribute to it, sound financial management plays one of the most crucial roles.

All kinds of small or large businesses benefit greatly from managing their finances. However, since small businesses have much more to lose and little to fall back on, it’s even more crucial for them. You must prepare for all possible scenarios, from procuring capital to investing in your business, to ensure operations continue running smoothly. Knowing how your money gets spent is critical for making current and future decisions. Additionally, it offers tangible evidence for potential investors or bankers who may be looking to invest in your business.

So while your unique product or service may help you launch your business, it’s not what will keep it running. Most entrepreneurs make a habit of putting off managing finances, and this is where everything starts going downhill.

To keep you from falling into the same chaos, here are six tips that can assist you in managing your business's finances quickly and efficiently.

1. Gain relevant knowledge

Education has remained a key factor in driving business profits for a long time. The knowledge, skills, and experience you gain through certified courses can help you understand your business better. For example, a certified management accountant is likelier to make smarter decisions because of his sound knowledge and expertise in finance. Enrolling in a Wiley CMA review program can help you prepare for the exam and allow you to learn essential topics at an accelerated pace. Owners with such qualifications save valuable resources because they don’t have to hire third-party firms or accountants to do their books.

No one understands your business better than you. And so, no one is more qualified to handle your finances based on your goals for the company. Equipped with the relevant education, it’s improbable that you’ll run into a financial dilemma that hits you out of the blue.

2. Open a separate business account

Mixing your personal and professional expenses is a recipe for disaster. Most small business and startup owners use personal funds to invest or cover the costs of business operations. The revenue they receive gets deposited back into their bank accounts. Although this may seem logical, the process quickly becomes complex, and you may end up digging into savings that aren’t for business use. It also increases the chances of overspending and makes it difficult to track how much money you spend and receive.

More importantly, keeping your bank accounts separate is necessary if you want to claim tax deductions or calculate your Employee Retention Credit for your business. No government agency will allow you exemptions or refund credits without proper documentation to prove which transactions are personal and which ones are for your company.

3. Stay organized

Businesses have numerous receivables and payables you must attend to throughout the year. Without a proper system, missing out on one of these transactions is inevitable and may result in serious complications. To keep your finances from becoming chaotic and unmanageable, organize them in a suitable way that doesn’t waste your time and gets the job done. Ensure all your paperwork gets filed in its appropriate place so you can quickly find whatever you’re looking for. Some documents you must pay special attention to include:

bank statements
contracts and leases
bookkeeping and accounting reports
licenses or permits
purchase orders and invoices
employee records

4. Stick to your budget

Setting a budget and sticking to it might be one of the most challenging things a business owner must do. For example, experiencing one bad month may quickly discourage you and force you to make more extensive investments beyond what you can afford. Or, when you start making profits, you may be tempted to expand your business before you’re financially capable of making that decision.

To avoid such circumstances, you must carefully plan a well-thought-out budget and then religiously stick to it. You must write this budget down because having it in your head isn’t good enough.

When you decide on a budget, you’ll have to consider crucial business details such as variable and fixed costs and operating expenses. Having all this information allows you to develop an ideal plan that can assist you in forecasting revenues and identifying potential cash bleeds.

5. Monitor cash flow

A study by US Bank showed that around 80% of small businesses fail due to a poor understanding of cash flows. The amount you receive is known as inflows, while expenses are outflows. Therefore, in simplest terms, cash flow refers to the total revenue that goes in and out of a company. Assessing when, how much, and where they originate are crucial for financial reporting and subsequent business decisions.

Once you understand what cash flow is, pay attention to patterns and trends to pinpoint problems early to solve them quickly and efficiently. A positive cash flow puts you in a better position to reinvest in your business, recover loans, or set aside emergency funds. In contrast, if it’s damaging, you’ll have to rethink operational costs and restrategize your business plan to avoid further losses.

6. Routinely review financial reports

Several types of financial reports provide business owners with essential insights regarding their business. But the key lies in reviewing these statements routinely, either annually or bi-annually, to run the company effectively.

The following reports are the top most crucial ones you most definitely shouldn’t miss reviewing out on:

Balance sheet

This financial report provides details regarding a company’s current liabilities, assets, or shareholder value.

Covenant projections

When a bank or investor loans or invests capital in your business, they want to know what your plans for the company are. The ideas you offer them are covenant projections. And so it helps to review if your business complies with these to ensure your lender has no issue.

Weekly KPIs

Key performance indicators (KPIs) are essential in helping businesses understand the successes and failures of routine operations. Review them weekly and share data with your team to identify areas of improvement and weaknesses.

Conclusion

As a small business owner, you probably already have a lot on your plate, and putting off finances for another day may seem tempting. But delayed financial management will likely end up costing you valuable resources. So follow these simple-to-do tips and take your small business to the next level quickly and efficiently.