10 tips for managing your small business finances
The idea of running your own business can be exhilarating. It, however, comes with various challenges, particularly when it comes to effectively managing business finances. Overcoming these challenges is necessary to run a successful business and ensure its long-term growth.
Why is it so important to efficiently manage your business finances?
Managing finances effectively is one of the most critical aspects of running a business. Every business owner needs to learn this skill, regardless of how big or small their business is.
No matter what industry you look at, most companies’ downfall results from poor or limited knowledge of financial management.
Business owners need to understand their industry, resources, and operations and use that information to manage their finances and take the business toward growth.
Tip #1: Keep your business and personal expenses separate
As a rule of thumb, personal and business finances should never be mixed. It can make tracking incoming funds and spending difficult or lead to overspending as you may use private funds for business expenses and vice versa.
As a bonus, you can write off (get a tax deduction) certain business-related expenses when you keep your personal and business finances separate.
Tip #2: Create a budget for your company
Creating a budget can help you anticipate your company’s revenue and even identify unnecessary expenses. It’s the most significant aspect of financial planning.
You can start with an operating budget that includes all the essential information about your company’s variable costs, fixed costs, and operating expenses. It can help you understand whether your expenses are on track or not and project your revenues for the year.
After that, you can create a cash flow spreadsheet that will help you keep track of incoming and outgoing funds. With this, you can be aware of your company’s financial condition.
Tip #3: Manage debt properly
Borrowing funds may sound like a good solution when cash flow is low, or your business is growing and expanding. But too much debt can turn out to be a considerable burden.
For small businesses, short-term loans like payday loans can be a lifesaver. However, you can easily find yourself needing to borrow more money just to repay those loans. In situations like that, you need to find a debt relief option that can help you come out of debt most effectively.
For instance, you can consolidate payday loans to escape the debt trap. With debt consolidation, you can reduce your debts without adversely affecting your credit score.
Tip #4: Maintain your business records in order
Every business owner, regardless of the size of their business, must maintain records of every transaction. Keeping proper business records will help you stay updated with all financial transactions during a specific period. In addition, adequate bookkeeping will help you keep an accurate record of your income and expenses.
Tip #5: Set money aside for taxes
In reality, no one can run away from paying taxes. Therefore you should always set money aside from your income to pay taxes. It’s best to put a minimum of 25 percent of your income aside, to pay taxes and avoid stress later.
Tip #6: Be economical
You need to be economical when spending money as a small or startup business owner. Being frugal doesn’t mean cutting back on essential expenses, but spending only the least possible amount.
For instance, instead of spending lavishly on hotels and travel for meetings, aim to spend the least money as possible to comfortably rest and travel from meeting to meeting. Investing vast amounts of money for rapid expansion or spending too much money on creating business cards, marketing materials, cars, etc., too quickly can burn your cash reserves and create a cash flow problem.
Tip #7: Start an emergency fund
Securing an emergency fund is one of the essential factors in efficiently managing the finances of your business. Your sales figures may not be consistent month after month, and planning and securing an emergency fund is necessary to ensure constant cash flow.
You can create an emergency fund and secure a portion of earnings in months of high sales to help pay off-month expenses. Calculate the amount of money you’ll need to cover the costs for six months. Your emergency fund would be ideal if it covered at least six months of expenses.
Tip #8: Get a business credit card
Maintaining a business credit card can be beneficial for making various business-related transactions. You can pay your business bills and other expenses with your business credit card. With free short-term credit, business cards can increase your company’s purchasing power while improving the cash conversion cycle.
In addition, they have higher credit limits, meaning you can cover your business expenses without exposing yourself to personal liability. You may find various business credit cards that provide rewards every time you make a business-related expense.
It also helps to keep your business account separate from your personal account. Bookkeeping and calculating tax deductions will be much easier and you won’t make mistakes like paying your debt with funds stored for operating your business.
Tip #9: Consider renting instead of buying
As a small business or startup, maximizing revenue from your business is crucial. In some cases, renting, instead of buying, can help you cut back on expenses and ensure you save money. For instance, renting equipment allows you to save on maintenance costs.
You can also avoid overpaying for equipment that may only be needed for a limited time. At the same time, you can look to rent an office space instead of signing a long-term lease or buying a property. Renting office space for a short time will be helpful when you consider relocating or expanding in the future.
Tip#10: Make sure you pay yourself
You shouldn’t neglect or overlook yourself as a business owner, remember, you, too, are working for your business. That doesn’t mean taking all the profit as soon as you make it. It simply means treating yourself the same as you would a working paid employee of the company.
You can start by giving yourself 10% of the revenue and providing other government-mandated benefits. This way, you can consistently save money while testing the viability of your business.
Managing finances correctly is key to business success
Starting your own company and dreaming of taking it from a small business to a vast market giant can be thrilling and challenging at the same time. Having the necessary knowledge and understanding of business and finances is extremely important.
Managing finances efficiently is one of the critical aspects of a successful business. It includes having enough funds secured for off-months, being economical, managing your business debts, and not mixing business and personal finances.
Managing your finances can sometimes be challenging, and there’s always the chance of making a mistake. If that happens, don’t hesitate to seek help from a professional who can help get you started or put you on the right track.
Lastly, by keeping close track of your business’s cash flow and finances, you can make better financial decisions and help your business grow.
Lyle Solomon is a Principal Attorney at the Oak View Law Group in California. He is a graduate of the University of the Pacific’s McGeorge School of Law in Sacramento.