Any of the 31.7 million small company owners in the United States today will tell you that success demands a good mix of passion, drive, and unwavering dedication. But this isn’t the entire picture.
Based on financial administration, budgeting, bookkeeping, and taxation, building and maintaining a solid business are also very important.
Many aspects might influence the success of your new business, but none is more crucial than financial management.
You may have chosen to build a restaurant because you enjoy cooking or a photography studio because you excel in front of the camera, but beginning a business does not imply that you will become an accountant.
Understanding the fundamentals of small business finance is key to guaranteeing your company’s future. Those fundamentals serve as an essential foundation for any growing company.
➡️ BUDGETING IS THE ANSWER
The budget is the most key component of any financial plan. But how can you budget when you don’t know what’s coming in? One of the most straightforward places to begin is to cut down on your personal costs as much as possible.
A budget should not be viewed as a plan for where you will spend every dollar, but rather as a framework for making sensible judgments about how you will spend your money.
Keeping a constant check on your cash flow, expenses, and revenue in a for-profit business is a must if you want to maximize profits, grow, expand, and hire more people.
In the event of an audit or investigation, effective oversight of donations, grant money, and all other sources of income are required for a non-profit organization.
Make a list of categories, such as housing, transportation, groceries, memberships, and entertainment, and then figure out how to cut costs in each category as much as feasible.
Once you’ve done that, calculate how much money you’ll need to cover those expenses while still having money left over to save or reinvest in your business; this should be your profit target.
➡️ STOP MICROMANAGING AND HIRE PROFESSIONALS
If you’re reading this list, you’re most likely not an accountant. While it’s usual for entrepreneurs to try to handle everything themselves (especially when trying to cut costs), trying to manage your own books or file your own taxes could end up costing you a lot more in the long run.
Investing in a professional can often result in cost savings (and will always help you save the headache).
Accountants will not only help you identify greater deductions and tax savings, but they will also make sure you don’t get into trouble unexpectedly.
➡️ BOOKKEEPING CAN BE HANDY IN THE LONG RUN
Bookkeeping is a way by which a business owner maintains track of all financial transactions that occur during a given period of time (often monthly). You can use a pencil and a ledger book to keep track of your finances the old-fashioned way.
You can also use cloud-based bookkeeping software like QuickBooks, Xero, or Mint, most of which are reasonably priced. There are other free options accessible. Some small businesses choose to hire a qualified bookkeeper as a contractor or part-time employee to handle this responsibility.
In a business, bookkeeping is a crucial, though transitional, function to the accounting function.
A bookkeeper gathers evidence for each financial transaction, writes it in the accounting journal, analyses it as one or more debits and credits, and organizes it according to the company’s chart of accounts.
Financial transactions are all taken into account, but they must be reviewed at the completion of certain time periods. Some companies need quarterly reports.
Other smaller businesses may simply require reports at the end of the year in order to file taxes.
➡️ NEVER FORGET TAXES
Tax season may be difficult, frustrating, and a few other words we might not want to say. Even something as basic as a misplaced bill or receipt can wreak havoc on your tax filing process and land you in serious trouble.
Paying taxes is always the most disliked task but is equally inevitable. The government would not give a damn if you are having issues in your business; when you owe, you owe, and you don’t want to be caught off guard by an unexpected charge.
Your tax rate will vary based on where you live, but a basic rule of thumb is to set aside at least 35% of your income for taxes.
➡️ SET A PROPER PAYROLL
If your company has employees, you must be very careful when it comes to payroll. Accounting software can assist with this, and you should consider creating an employee handbook to reduce workplace strife (including policies relating to paid time off, bonuses, etc.).
If your company took out a PPP loan, there are some additional payroll issues to consider.
You should also choose a payout schedule that complies with all state regulations and allows you and your staff the most financial flexibility.
A good pay schedule is one that corresponds to when you have money coming in and allows you to pay your employees as often as possible.
Employees can make better financial decisions if they can get paid quickly when they earn it, whether it’s weekly or instantly.
➡️ UNDERSTAND THE ALPHA AND OMEGA OF CASH FLOW
The success of a small business relies heavily on cash flow.
One of the most common reasons for business failure is a lack of capital. Even the most profitable companies can swiftly become insolvent if their cash is locked up in late or unpaid invoices and they are unable to pay their creditors.
The early stages of your firm or an organization are one of the most difficult times for cash flow. While you’re busy building up your company, you’ll have a lot of expenses but no clients or consumers to generate revenue.
That’s why it’s critical to think about your cash flow position right away and ensure you have a temporary cash source, such as savings or an overdraft, to keep you afloat while you wait for the money to come in.
Creating a cash flow statement and forecast is the ideal method to keep a close check on the flow of cash in and out of your company.
These straightforward financial records will provide you with a view of your current monthly cash flow as well as your projected monthly cash flow.
➡️ KEEP A CLOSE EYE ON ROI
Measuring expenditures and return on investment can help you figure out which investments are worthwhile and which aren’t.
“Small business owners should be cautious about where they spend their money”, according to Deborah Sweeney, CEO of MyCorporation.
“Focus on the ROI that comes with each of your expenditures,” she said. “Not doing this means that you can lose money on irrelevant or bad spending bets. Know where you are spending your hard-earned dollars and how that investment is paying off. If it isn’t paying off, cut back and spend a bit more on the initiatives that do work for you and your business.”
➡️ MINIMIZE DEBTS
While borrowed money makes sense when cash flow is tight or a company is growing or expanding, too much debt can become a burden. There is indeed a thing as too much funding, as WeWork and Wag demonstrate.
There are various strategies to keep a company from going bankrupt due to debt.
1⃣ Reduce your expenses. Is there any space or equipment that you don’t use? Think about selling it. Is it possible that payroll is to blame? As far as feasible, reduce overtime and overstaffing. Here are five more spots to cut that is relatively painless.
2⃣ Encourage your customers to pay their bills and spend more. This is an excellent moment to communicate with your customers. If it means they can pay you faster, provide discounts. Offering a discount for early payment can be a wise decision.
3⃣ Be truthful to your creditors. Share your situation with them and see if they can help you cut your interest rates, boost your credit line, or rearrange your repayment alternatives.
You might also hire a debt reduction business to negotiate on your behalf to settle your obligations at a lesser rate. Consider utilizing the concept of force majeure as a last resort, especially if the epidemic has wreaked havoc on your firm.
4⃣ Merge your debts. You can typically cut monthly expenditures without affecting your credit by merging your debts into one payment.
Consider a debt consolidation loan for your business, which can be unsecured or secured by your company’s assets. Instead of dealing with multiple creditors, you may deal with only one with this loan. It may also result in a lower interest rate.
➡️ FINANCIAL COACHING IS IMPORTANT FOR YOUR BUSINESS.
Small business owners can benefit greatly from financial groups. They will provide you with the information you need to make wise financial decisions. Don’t be scared to seek the assistance you require to succeed.
💥 BONUS TIP
It’s critical to maintain a keen eye on your company’s spending. You can quickly create helpful reports using good accounting software, such as:
BALANCE SHEET REPORTS
These show assets, liabilities, and net equities.
CASH FLOW STATEMENTS
These depict how money flows in and out of a company.
Reports on Profit and Loss
These represent the income, expenses, and profits of your business over time.
These provide you with a breakdown of the value of your company’s assets.
Payable and Receivable Reports
These display how much money your company owes to others and what others owe to your company.
ALL IN ALL ➡️
Managing your small business’s finances isn’t something you should put off. It must become a central part of your plan if your company is to survive beyond the five-year mark when half of all UK small firms have already failed.
Understanding the numbers that drive your business can help you make better decisions and identify when it’s time to invest in expansion and when it’s time to decrease costs.