Having a great product or service contributes only a part to the success of your business. Knowing how to manage the finances of your small business and taking advantage of growth opportunities make up the other part.
It’s a fact that 82% of small businesses fail due to poor cash flow management. That goes to show why you shouldn’t start a business if you’ve not thought about how to manage the finances of your small business.
This article discusses essential tips you need to properly manage your small business finances and build your business into a dominant force in your industry.
7 Tips on How to Manage the Finances of Your Small Business
1. Create a Budget
Creating a budget is one of the first things you must do to get a clear view of where your business finances are headed. A budget helps you understand clearly your revenue generation systems and what your business will be spending on.
Since it helps define your future revenue and expenses, a budget is ideal for curtailing unplanned expenses, ensuring the business funds are used as planned. This is important because as a small business, there’s a lot to spend on, and it’s easy to get carried away by these things that you forget you should spend based on a scale of importance.
2. Separate Business and Personal Finances
Keeping a separate business bank account from your personal account is ideal for tracking and managing your business finances. This is because mixing your personal and business funds can lead to miscalculation and mismanagement of business funds. You will end up using personal funds for business purposes and funds meant for your business to sort personal problems.
While it is not compulsory, separating your business and personal finances helps you get clarity on the income and expenditure of your business. You can keep track of the money received, and the expenses made and determine if they were put to good use.
Furthermore, having a business account helps you properly calculate your tax and ensures you claim tax deductions for certain business-related expenses.
Read: How to Test the Viability of Your Business Idea in 5 Simple Steps
3. Invest in the Growth of Your Business
The ability to forecast the future and invest in business growth is what separates successful businesses from the rest. Set aside a percentage of your annual business profit to take advantage of growth opportunities in your business.
Being future-centric is essential to helping a small business attract, manage and retain the best customers and employees. The increased level of product and service delivery will keep the customers satisfied and turn them into business loyalists. For the employees, it shows you’re interested in their career growth, which would make them give their best service to your business.
Investing in business growth also helps your business diversify and provide service to a larger audience, increasing your revenue generation opportunities.
4. Track Your Business Expenses Regularly
Tracking business expenses regularly is an essential way to manage your business finances. It helps you discover unnecessary or not-so-important bills that will affect the business finances if left unchecked.
These expenses can come as insignificant spending here and there that amounts to a larger, worrisome bill. From providing daily lunch to employees, getting them coffee from Starbucks or purchasing a new coffee machine, to expenses incurred from late credit payments or use of unimportant premium software subscriptions.
While some of these expenses might be insignificant to well-established businesses, they could mean so much to your small business, especially when you look at their accrued total in the long run.
On the other hand, tracking your business expenses helps you see investments that are yielding positive results. Channelling more funds into these investments might lead to greater revenue generation for the business.
Also read: How to Grow Your Business on a Shoestring Budget
5. Don’t be Scared to Leverage Loans
The most successful businesses are those that have learned to use loans appropriately for business development.
Loans are powerful growth-building tools in the hands of a good financial manager. They provide the extra capital needed to purchase that equipment that will boost revenue, buy more business stocks or pay employees to keep them happy.
It is okay to worry about the financial repercussions of loans, especially in the event of a default. However, if the loans are put to good use, the business will generate enough revenue to service the debt. Plus, most good small business loans come with affordable interest rates and long repayment periods.
6. Treat Tax as a Monthly Expense
Quarterly tax deductions are among the biggest expenses most small businesses make. These deductions can affect your working capital, especially if you didn’t budget for them.
The best way to handle tax payments is to treat them as monthly expenses. That way, you can budget for them every month and set aside money to pay them off on time.
7. Set Up a Good Internal Control System
If you have employees working for your small business, it’s essential that you set up a strong internal control system. Setting up a strong internal control system ensures that you accurately and regularly review and update your financial information. Keeping your financial records up to date and having accurate information stored safely helps mitigate internal fraud or risk.
According to research by Statistic Brain, employee theft costs small businesses in the US $50 billion annually. Now, that’s a crime that often goes unnoticed due to how insignificant it might be at the time of occurrence or due to the criminal’s ability to cover it up. These embezzlements sink the finances of most small businesses, causing them to go bankrupt in severe cases.
However, with a strong internal control system, crimes like employee theft would rarely go unnoticed.
Conclusion on How to Manage the Finances of Your Small Business
Small businesses thrive on cash flow. Quick access to funds and stronger financial control protocols ensure your business never misses out on growth opportunities.
Many small business owners make the mistake of thinking quality products and service delivery are all they need to make their business successful. While those are important, being able to manage your finances is what keeps your small business going. Because you’d be able to take advantage of opportunities to develop your business into a profitable brand.
