Running a small business can be extremely challenging, especially when you’re just starting out and need to be careful about every penny. In fact, two-thirds of small businesses struggle with finances, and 40% face a debt of $100,000 and more.
If you want to avoid becoming part of these statistics, you need to be meticulous and proactive about your finances. That’s one aspect of your business that allows little room for mistakes. One oversight could lead you into bankruptcy.
Here’s what you need to know to make your small business financially stable.
Understand Your Cash Flow
Knowing your cash flow situation is vital for the success of your business. One of the main mistakes small business owners make is equating their income with profit. This can give them a completely wrong picture of the amount of money the business makes every month.
So creating a cash flow statement that shows your income but also your expenditures is essential if you want to know the real financial state of your business. Months of diligent cash flow monitoring will make you better at forecasting your financial needs and prospects. This awareness is the cornerstone of managing your finances.
Budgeting Is a Must
When you’re aware of your cash flow, you can proceed to plan a monthly budget. Of course, you can also do some long-term budgeting, but knowing how to allocate your resources each month is vital for your business’ survival.
Start by determining your fixed costs, such as your rent, payroll, insurance, etc., and plan for them first. This part is the sum you absolutely need to have every month, and it’s non-negotiable. Then, think about the variable costs, such as travel and advertising expenses or contractor wages. Finally, think about any one-time expenses you might incur and factor them into your plan.
Monitor Your Books Closely
Small business accounting can be tricky, so if you decide to do it yourself, you better prepare in advance and invest in premium accounting software. The software can make your job so much easier, reduce manual errors, and create comprehensive reports, which can be extremely helpful. However, as a business owner, you probably have a million things to do already and may feel overwhelmed.
If you’re not sure you can handle this part yourself, it’s best to hire an accountant. You can either go for an in-house accountant or outsource, but these professionals will make sure your books are in order.
Know Your Taxes
Even if you decide to do your books yourself, you might want to consider hiring an accountant to do your taxes. We all know taxes can be daunting, and it’s easy to mess them up. You need to be a meticulous record-keeper and know the tax deductions you can use to lower your bill. An experienced accountant can help you slash your taxes significantly.
What’s more, if you’re dreading the quarterly payments, spread them out and pay your taxes monthly. Sometimes, it’s easier to think of them in monthly installments as they are more manageable.
Keep a Good Credit Score
Maintaining a good credit score is vital for your business. Whenever you need to acquire external financing, your credit score will determine your success or failure. So the better your credit score, the better financing options you’ll be able to get (not to mention smaller interest rates).
Pay your bills on time, lower your credit utilization, check your credit reports regularly, and overall, do everything that’s in your power to keep a great score.
Have an Emergency Fund
If you’re already struggling financially, you’ll probably regret not having an emergency fund in place. No matter your income, try to set aside a sum you’re comfortable with every month for this purpose. It’s best to have at least two months of payroll saved.
You never know what might happen — the coronavirus pandemic has shown us how fast the tables can turn and leave us helpless. An emergency fund can help you survive even without any income at all. What’s more, you won’t have to tap into your personal funds to save your business.
Nurture Great Financial Habits From the Get-Go
All in all, the best way to manage your finances well is to create great financial habits from the start and stick to them. If you’re proactive and careful and know exactly what to watch for each month, chances of you missing something essential are much lower.
What’s more, if your clients see you as responsible and highly professional, they’ll treat you that way too. For example, you can’t force anyone to pay you, but if you’re not late with invoices and you set payment timelines, you’re much more likely to get paid on time.
Shortage of funds is one of the main problems small businesses face. But as you can see, managing your small business finances doesn’t have to be a drag. You just need to know what your responsibilities are and be consistent.