What’s the biggest concern you have with your small business? We’ll hedge a guess and say money is likely to be right up there at the top of the list.
Getting to grips with finances can be a challenge for small business owners. While you may be fine with budgeting, you might struggle to maintain a healthy cash flow.
The following money management tips will provide some practical advice on how to handle your finances, increase monetary awareness and make you a better business owner overall!
1. Understand accounting basics
Money that comes in is your ‘income’ and what goes out is your ‘expenses’. What’s leftover is your ‘profit’. But keeping track of all the comings and the goings can be difficult if you don’t have the right software.
An Excel spreadsheet isn’t a bad solution but there are platforms that are designed specifically for keeping you in the loop and running your business on the go.
One of the best is Xero – an easy to use accounting software that is desktop and mobile friendly. It gives you real time data so you can see your financial position at a glance, and has loads of handy features for keeping your business on track from month to month and year to year.
2. Make a mindset shift: get comfortable with the basics
Many of us have a tendency to choose money blindness over financial awareness. For some business owners (myself included!), we view our bank accounts as being directly related to our own self worth. We decide to pull the wool over our eyes and simply hope for the best until the end of the year. However, it’s important (and critical to the health of your business) that you begin to view money as a tool, without the emotional attachment of judgement and expectation. Awareness is power and the impetus to change and financial health.
So if you find yourself saying things like, “I’m just no good with money.” or “I’m terrible at math.” it’s time for a mindset shift.
Empower yourself by becoming familiar with the following reports:
- Balance Sheet – a snapshot of the assets, liabilities and equity of your business.
- Income Statement – annual summary of your income and expenses so you can calculate your net profit or loss for that year.
- Cash Flow Statement – tracks your cash flow over a month or financial quarter.
- Revenue Forecast – estimates your profit margin for the upcoming year and what you can afford to spend.
3. Get on a schedule : pay your business bills
One of the features that you should look for in any accounting app is the reminder function to pay your bills.
Bill payment is a crucial part of managing any business. Late payments incur fees of course, but being delinquent can also result in mistrust from vendors, contractors and employees–essential relationships for running a successful business. It can also give clients the impression that you’re unreliable, flakey or incompetent–and they may not do business with you again.
4. Use a business bank account
You’ve heard the saying ‘don’t mix business and pleasure’. The same goes for your bank accounts. You business should have a separate bank account from your personal finances. This saves a lot of confusion at tax time when you have to try and identify business income and expenses from your personal transactions.
A separate business bank account also shows the IRS that your business is a legitimate enterprise and not a hobby. Again, having a good accounting software can make prepping for tax time a lot easier as it keeps a clean record of your finances throughout the year.
Click the following to do a deep dive into the 10 Best Small Business Checking Accounts.
5. Save documentation and receipts
As a small business owner you can deduct certain business expenses from your income, so you don’t have to pay as much tax. But in order to do this you need to save documentation and receipts for these expenses.
A well organised filing system might suffice if you only have a few expenses. But most small business owners will use an app to snap a picture and the details from the receipt. Xero has a function that does this but there are lots of other record keeping apps that do this too.
6. Set SMART goals
Keeping your business running on a day-to-day basis is a great goal. But it’s the very least you should aim for. Successful businesses have a game plan in mind and set goals for the future.
Such goals could be, for example:
- to make more profit
- reduce ongoing costs
- take on a new staff member
- increase website traffic, or
- ramp up productivity.
Once you’ve identified your goal/s you need to turn each into a SMART goal – i.e one that is specific, measurable, attainable, relevant and time-based. For instance, if you want to take on a new staff member use the financial information you have from your revenue forecast to see if the goal is affordable and when you can start hiring.
Is your business where it needs to be financially?
According to Fundera “20% [of small businesses] fail in their first year, and about 50% of small businesses fail in their fifth year.” Poor money management is often one of the reasons that a small business will go under.
But practicing good money management is a fail safe for your business and it will help you to identify where you need to make improvements, and to act quickly so you can head problems off at the pass. This way you can ensure the financial health of your business for the future.