Small Business Finances: 10 Management Tips

Every successful company starts with a well-managed financial plan. It is important to be effective in controlling your finances, so you can achieve your set objectives.

Financial management, however, cannot be over-emphasized as it is often the most overlooked area of business by both owners and non-owners alike. But here’s the good news! Listed below are the best tips on how to manage your finances and take control of your money:

Every successful company starts with a well-managed financial plan

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1. Know your numbers.

Making profitable business decisions requires you to understand what makes your business successful. You should understand the difference between revenue and profit, and how to calculate them both. When going over the numbers, it’s important that you know the key metrics used to track financial performance such as cost of goods sold (COGS), gross margin, profit margin, operating income (EBIT), net income before taxes (NIBT), EBITDA, free cash flow and return on investment (ROI). If you aren’t familiar with these terms or how they’re calculated, here’s a quick overview:

  • Know your break-even point. The break-even point is when revenue = expenses. In this case, your business does not make any money but does not lose any either. Knowing where this line is will help you decide what sales goals must be met in order for you to make a profit.
  • Understand your profit and loss statement. A Profit & Loss statement (or “P&L”) shows all revenue for the period compared against all expenses for that same period – resulting in either a net income or loss for that time frame. Having a handle on these numbers can help owners see trends and allow for better decision-making about future spending patterns.
  • Know your Cash Flow statement. This record outlines where money arrives from and goes out of a company over time, whether through operations or other sources/uses such as investments/financing activities.

2. Avoid the cash crunch.

A cash crunch happens when a business suddenly runs out of money on hand, usually because their expenses are exceeding their revenue and they’re unable to pay their bills. This is a common problem among small businesses and is often cited as one of the main reasons for business failure. If you want to be successful with your own small business, it’s important that you learn how to manage your finances in such a way that you never experience a sudden cash crunch.

According to a Goldman Sachs poll of more than 1,100 small firms, 44 percent of US small enterprises have fewer than three months of cash reserves, putting them at risk of another shutdown due to COVID-19 or other financial difficulties.

One of the best ways to avoid this issue is by setting aside some money every month into a savings account specifically for your business. That way, if things get tight, or if anything unexpected comes up, you’ll be prepared and able to cover it without having to resort to borrowing from friends or taking out additional loans.

3. Keep your budget on track.

Budgeting is an essential component of running any business. It will help you manage your costs and make sure that your income exceeds those expenses so that you can put money back into your business or keep it for yourself (if you’re a sole proprietor).

When preparing a budget, it’s important to take into consideration all of the expected costs for each month, including:

  • Rent 
  • Wages 
  • Insurance 
  • Utilities 
  • Materials/supplies 
  • Marketing materials
  •  Any other recurring payments

Remember that a well-planned budget can aid in the growth of your company. On the other hand, a company without a budget risks spending money it doesn’t have, not spending enough to compete, or failing to develop a strong emergency fund.

4. Project your profitability.

When starting a business, you must project your profitability. The accounting definition of profitability is when a company’s total income exceeds its entire expenses. According to Iowa State University, this figure is known as net profit, or income minus expenses. Income means the total revenue generated by a business. On the contrary, marketing and product costs are examples of expenses.

Projecting costs, revenues, net income, and cash flow is essential to the success of your business. Accurate projections will help you determine if there is a market for your product or service. If the numbers indicate that it won’t be profitable to produce an item or offer a service, maybe you should consider changing the product or service so that it can be profitable. Without accurate projections, you will risk running out of cash early on in the game.

5. Pay yourself first.

Although it may seem counterintuitive, paying yourself first is the best way to ensure that your finances are secure. Employees may wait until their paychecks come around to make financial decisions, especially if they’re on a biweekly or semimonthly schedule. But business owners should set aside a percentage of each sale for personal spending. By doing so, you’ll be able to manage your own money and won’t have to worry about going through the same financial problems that many small businesses do.

On average, business owners should aim to take anywhere from 15% to 50% of their earnings as compensation. The exact amount will vary depending on how much revenue is generated in a given month and what other spending needs there are for the business—but it’s important that you pay yourself regularly and consistently, even if it means taking less than you usually would in a given month.

According to Whitney Delaney, founder of Delaney Tax & Wealth Management, “I recommend paying yourself a modest salary as modest as you can afford; being fiscally conservative will cause you to incur fewer taxes, so you will be able to invest more into your business.”

6. Practice good payment habits.

Ensure that your vendors, contractors, and workers are paid on time so that you can build a positive reputation and ensure customer trust. Pay vendors, monthly service providers such as utility companies, and credit card bills on time to avoid late fees or penalties. In addition to being good for your business’s reputation, paying creditors in a timely fashion also helps maintain your access to credit when it’s needed most — like during the holiday season when sales are strong.

Set up reminders for yourself to make sure you pay your bills on time every month set up reminders or have automatic payments scheduled through your bank or software system of choice.

7. Deal with debt wisely.

It is possible, in fact, to manage small business finances through debt management. You need to first determine the difference between good and bad debt.

Good Debt: When it comes to good debt, the main difference is that there’s a clear return on your investment. For example, let’s say you want to start a new project but don’t have the funds to get it off the ground. If you take out a loan and use that money to generate income then it would be considered good debt as long as the generated income is enough to cover both your costs and your repayment amount.

Bad Debt: Bad debts are usually made up of unnecessary expenses such as expensive cars and other items or services that don’t really bring any value back into your business. They are also made up of credit card balances which should be avoided at all costs unless you have a plan in place for paying them off (you should). Sometimes even taking out loans for starting new projects can backfire if not handled properly so make sure you know what you’re doing before getting involved with this type of financing option!

8. Set up money for taxes.

Taxes are the ultimate depressant. They’re always there, lurking in the background, ready to eat away a chunk of your profits or raise your stress levels. To avoid this, you can set aside money for taxes and file quarterly tax estimates with the Internal Revenue Service (IRS). However, this only applies to business owners who pay individual income taxes.

Many small business owners forget about taxes until the due date rolls around. In order to make sure you don’t get stuck with a huge tax bill at year-end, put aside money for taxes throughout the year by paying estimated quarterly tax payments to both the IRS and your state. If you don’t withhold enough from your employees’ paychecks or if you have additional income such as interest or dividends beyond your salary, then you should increase your quarterly payment amount so you don’t end up owing Uncle Sam more than anticipated at year-end.

The Best Method For Stashing Money Aside For Taxes:

  • Set up a separate bank account that is solely dedicated to tax payments. Deposit money into this bank account every time it comes in so that when it comes time to make those hefty quarterly installments, all of the payment funds will already be available and accounted for.

9. Be wary of expensive “free” services.

As appealing as it might sound to use a free service, many of these services usually have hidden costs and can lock you into contracts. If a service seems too good to be true, it probably is. Free services may also not offer the same level of security or the detailed features that paid services offer.

According to a new West Monroe poll of 2,500 consumers about how much they spend each month on a range of subscription services, people are spending 15% more than they did in 2018. Subscriptions have also become increasingly diverse as more businesses develop digital platforms and offer to attract customers.

The average surveyed consumer reported spending $273 per month on subscription services, up from $237 in 2018. This additional 15% equates to an additional $430 spent per year.

These figures suggest that free can sometimes be expensive. Hence, we must be aware of our monthly subscriptions as they’re considered part of our expenses.

10. Get professional advice, but not too often.

Getting a pro to handle your small business finances can have many benefits. Accountability and peace of mind, for instance. But getting an accountant isn’t something you should do lightly. You want someone who knows what they’re talking about and can help with any problems that could arise in the future. If you don’t want to hire a full-time accountant, consider getting one just during tax season to ensure that you stay on top of things. Just make sure they know what they’re doing so they won’t cost more than they save!

Additional tips for managing your business finances:

  • Remember that your business is an investment, so don’t take it lightly.
  • Your business must pay taxes, just like any other property or vehicle.
  • To avoid overdraft fees or other fees, you should always have a positive balance in your checkbook.
  • Ensure your business’ success from day one by investing time and money into marketing.

Now It’s Your Turn! 

In your opinion, which of the financial management tips we’ve listed above should you start applying to your business now?

We’d love to hear your responses in the comments section, as we’d like to learn from you as well. Kudos!

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