Sound financial management is the secret sauce for the success of any small business. It encompasses various practices, such as bookkeeping, creating financial statements, accessing financing, and developing accurate projections. By mastering financial management, small business owners can make profitable decisions that benefit their business in the short and long term. So, if you’re ready to take your business’s financial health and success to the next level, here are 10 small business financial management secrets you need to know.
1. Budgeting
Create a detailed budget that includes all income and expenses. Budgeting allows you to see the money coming in versus what’s going out, helping you avoid overspending and ensuring you have sufficient funds for all necessary expenses. Remember to regularly review and adjust your budget based on your business’s financial performance. Address any potential issues, such as overspending or a lack of capital, by implementing effective plans.
2. Cash Flow Management
Regularly monitor your cash flow to ensure you have enough liquidity to cover business expenses, including payroll, inventory purchases, and all other operational costs. Calculate your current cash flow by subtracting expenses from income, based on when accounts payable are due and accounts receivable are expected to come in. To promote a healthy cash flow, negotiate favorable payment terms with vendors and suppliers and encourage timely payments from customers.
3. Separate Personal and Business Finances
To avoid confusion when it comes to your business accounting, clearly distinguish personal expenses from business expenses. Maintain separate business credit cards and a bank account solely for business purposes. Utilize these statements to monitor your business’s financials effectively. By avoiding the commingling of business and personal funds, you can prevent the risk of dipping into business funds to cover personal expenses and vice versa. It also helps you steer clear of difficulties with an audit.
4. Financial Statements
Understand and regularly review your financial statements, such as the profit and loss statement, cash flow statement, and balance sheet. These statements provide valuable insights, allowing you to identify trends, make informed decisions, and track the financial health of your business. If you need a refresher on what each statement is used for and the financials included, check out our informative blogs.
5. Record Keeping
Bookkeeping is the backbone of small business accounting. It involves keeping organized and accurate records of day-to-day financial transactions, including invoices, receipts, data entries, and categorizing each transaction. Consider utilizing accounting software, such as QuickBooks, which enables you to handle much of the process yourself. Alternatively, you can hire a professional bookkeeper to manage your business’s financial records.
6. Debt Management
When your business grows, you may need a small business loan to finance necessary purchases. However, getting approved for financing can be challenging if you have poor business credit. Bad credit can also result in higher rates for business insurance and hinder your ability to land contracts. To maintain a good business credit score, be cautious about taking on unnecessary debt and prioritize paying off existing high-interest debts. You can also negotiate favorable terms with creditors and explore options to refinance debt if needed.
7. Tax Planning
Every business must pay federal taxes, and how your small business is structured will determine how and at what tax rate you pay them. It’s crucial to have a clear understanding of your tax obligations and deadlines. Consult with a tax professional to ensure compliance and explore available tax deductions and credits to minimize your tax liability. If paying quarterly estimated taxes is a challenge, consider changing to monthly tax payments to ease the financial burden.
8. Emergency Fund
Even successful small businesses face unexpected challenges. That’s why keeping an emergency fund is critical. Open a business savings account and commit to making regular deposits. Aim to have at least three to six months’ worth of operating expenses set aside. With this cushion, you’ll be prepared to cover unexpected costs or endure slow revenue periods.
9. Insurance
Business insurance, also known as commercial insurance, is a wise investment that protects your small business against claims and lawsuits. It shields you from the financial burden of covering high claim costs, which could potentially put you out of business. Regularly evaluate your small business insurance needs to mitigate risks associated with unexpected events. Ensure you update your insurance coverage as your business grows or changes.
10. Continuous Monitoring and Adaptation
Set aside time weekly or monthly to review and monitor your books, even if you have a bookkeeper. This familiarity with your business’s finances allows you to detect anomalies, potential financial crimes, and gain valuable insights to make better decisions that impact your bottom line. Continuously monitor your financial performance and adapt your business plan based on the changing landscape. Stay informed about economic trends, market changes, and industry developments so you can adjust your financial plans as needed.
By focusing on these 10 small business financial management secrets, you can increase your profitability and keep your business running smoothly. Remember, the Oregon SBDC offers small business financial and accounting classes both in-person and online statewide. To locate classes at an SBDC near you, click here.
