A Comprehensive Guide to Small Business Financial Management
What do all successful small businesses have in common? Feel-good stories would have you believe excellent products or services are the hallmarks of corporate prosperity. But that's not always true.
It's savvy financial management that separates the wheat from the chaff. Obviously, running a great business is more than balancing the books. But business owners with poor financial management will collapse into bankruptcy from any matter of monetary woes.
Want to build a business with a fighting chance? Read this helpful guide and discover the basics of small business financial management.
1. Start Bookkeeping
Bookkeeping is no doubt the most important component of small business finances. For one, it's essential when it comes to making accurate tax payments every quarter and itemizing at the end of the year.
But businesses large and small also benefit from keeping a close eye on financial performance indicators. These include some of the basics such as gross revenue, expenses, and net profit. It's a good idea to keep your eyes on these numerics from month to month to gauge the health and success of your new small business.
If you've hired employees, you'll want to update the books weekly rather than monthly. You'll be able to locate payroll and cash flow issues in advance, allowing you to take advantage of payroll funding services. Failing to do so could lead to disgruntled employees and serious fines.
2. Create a Business Bank Account
New to freelancing or running a business? Many new business owners make the mistake of using their existing bank account. The problem is this can complicate your bookkeeping efforts, and it also leaves your personal money on the line if your business is ever in a legal dispute.
The solution is to open up a bank account specific to your business. It's the perfect way to track your finances and ensure you aren't overspending. In some cases, such as if you incorporate your small business, you're under a legal obligation to separate your bank accounts.
Some lenders have special business-related tools that come with their banking accounts, making it even easier to manage your finances and taxes when the time comes. And if you ever want to take out a business loan, a business bank account is an absolute necessity.
3. Make Billing Easy
The worst thing you can do is complicate the payment process. Small businesses already have enough trouble getting timely payments from clients who seek to exploit their naiveté. Since cash flow is essential to any budding business, a convenient billing strategy can ultimately determine its success or failure.
So how can you optimize your billing strategy? The best option is the offer a variety of options. This may mean payments over PayPal, credit cards, checks, and even cash depending on your industry.
If you're still having trouble, the right incentive can go a long way. Offer a small discount for clients who pay their bills on time. You can price it into the total cost so you don't endanger your profit margins.
A comprehensive contract also protects your business from clients who seek to stiff you. Of course, it oftentimes isn't worth the legal cost of extracting a payment if only a few hundred dollars are on the line. But for those with larger and more expensive projects, a written agreement is simply indispensable.
4. Give Yourself a Salary
It's true that it can take almost three years for your business to become profitable. But that doesn't mean you have to avoid making a personal profit from your business venture. In fact, you should include a salary in your small business finances.
Why? Wouldn't it be better to funnel all the profit back into the business?
Maybe. If your small business ends up working out in the long run, your salary could have increased its growth rate. But there's no promise that a small business will find success.
Conversely, paying yourself a salary allows you to put more time into your business that may have otherwise been impossible.
It also serves as a powerful barometer. Can you say your business is profitable if you're barely turning a profit? Being able to set money aside serves as a test of success and encourages you to make frugal business decisions.
5. Look at the ROI
Since small businesses have limited capital, every purchase counts. It's important that you get the biggest bang for your buck right away. However, don't adhere too firmly to this dogma.
Sometimes large expenses are superior to cheaper expenditures. Let's say you hire a college freshman to handle your website's search engine optimization. Even though it'd be a cheap expense, are you getting a return on your investment?
Not likely. In fact, it could be money down the drain.
Yes, expenditures matter. But the return on investment is more important.
Take a look at the analytics rather than trimming expenses wherever possible. It's better to cut a collection of smaller expenses with a low ROI rather than a large one with an excellent return.
Understanding Small Business Financial Management
For many small business owners, the prospect of managing corporate finances is a tall order. But the reality is it can be done with relative ease -- so long as you're prepared with the right advice.
Don't fear small business financial management. Embrace it. With sensible bookkeeping and simple systematic changes, you'll provide the firm foundation your business needs to find success.
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