Managing Small Business Finances: Best Practices

Running a small business is hard work. There are so many things to keep track of - from sales and marketing to product development and staffing. But one of the most important aspects of small business ownership is financial management. Protecting your investment means paying proper attention to financial details.

Not only will efficient financial management practices help increase your profits, but your diligence can also protect you and your staff from compliance issues and legal trouble. Those habits can also provide an important financial safety net during trying circumstances, such as . . . a global pandemic!

Protecting Your Bottom Line

Keeping a close eye on the cash flow, costs, and income is a must for any company looking to increase earnings, expand, grow, and hire extra help. Non-profit organizations also require careful watch of donations, grant dollars, and all other revenue streams in order to maintain transparency, and to account for an audit or investigation.

If you don't understand these fundamental financial metrics, there are certain obvious risks: if your company has investors, you are responsible for providing them with any requested financial information as an owner or manager. In addition to this, mismanagement of funds can lead to cash flow shortages that may cause supply-chain disruptions or delays in obtaining supplies from your vendors.

Best Practices to Manage Small Business Finances

It's not necessarily difficult to maintain a budget for your business, but it does take effort and dedication. That might go some way towards explaining how more than half of small businesses fail to survive their fifth year in business. The following are some tips you can follow to ensure the long-term financial success of your business:

Prepare a Budget

A budget allows you to keep track of every bit of money that comes into and leaves your business. To begin, make a list of all the anticipated monthly sources of income, such as sales, interest on investments, rental property earnings, and so on. Income data may be found in your profit and loss statement, which will be discussed in greater depth later.

Then, make a separate list of the expenditures you anticipate your business will have on a regular basis. Inventory purchases, payroll, insurance premiums, taxes, utilities, fees, and debt payments are just a few of the expenses that might be included in this category.

Learn Basics of Invoicing and Bookkeeping

Bookkeeping is the process of keeping track of all financial transactions performed by a company during a period of time, usually monthly. You may choose to bookkeep the traditional way, using a physical ledger.

You also have the option of adopting cloud-based invoicing software like Hiveage. We even have a free plan that is ideal for small businesses that are just starting out. Some business owners choose to outsource this whole task to a competent bookkeeper who might work as a contractor or part-time employee.

Keep Track of Cash Flow

A tracking record of your expenditures is a vital component to money management. According to one study, as many as 82% of failed firms blame cash flow difficulties for their failure. Unfortunately this has proven to be all too common with the current COVID-19 pandemic.

The cash flow statement is a financial report that details how much money was spent and for what purpose during a certain time frame. It aids in the prevention of pointless bank account overdrafts, overspending, and liquid asset hemorrhaging. Cash flow worksheets are readily available online, just as company budgets are.

Prepare a Profit & Loss Statement

A profit and loss statement analyzes your business’s total revenue, earnings, and losses over a certain time period (e.g., quarterly, annually). The statement is crucial for getting working capital or applying for a business loan. It's also critical for firms with investors or stockholders since it provides a comprehensive financial picture. Be sure to keep it current on a regular basis so that it is ready to use whenever needed.

Maintain Your Balance Sheet

A company's balance sheet is a document that keeps track of its assets, liabilities, and equity. The document is also crucial to maintain up to date, and the overall aim is to balance assets against liabilities plus equity. Lenders and investors pay attention to this document, so be sure to make regular updates as your finances change.

Forecast Your Finances

What is your perception of the near future for the business? It's critical to have a good idea of where you're going so that you can make informed decisions about whether or not it's time to apply for a loan, as well as whether or not it's time to cut back on expenditures.

There are a number of different methods for preparing a revenue forecast. When you are just starting out, working with an experienced professional to get the hang of this approach might be useful.

Organize The Basics

When it comes to financial management, your to-do list might appear daunting. These are some basic things you can take care of, in order to increase organization, efficiency, and compliance.

Get your tax ID for the business: as a small business, you would probably want the company to exist as its own entity. Check the rules of your jurisdictions for the details. In the US, for example, you can start by obtaining an EIN from the IRS.
Have a separate bank account: All business funds should be kept entirely separate from personal funds. Following the example above, once you’ve received your EIN, open a commercial checking account at a bank that you're comfortable with using it to do so. This is a critical step—many a tax issue can be avoided by keeping your business finances separated from your personal.
Set up payroll properly: If you have staff, you must be extremely careful in correctly establishing payroll. Also consider developing an employee handbook to keep workplace conflict to a minimum (including policies relating to paid time off, bonuses, and other issues).

Be aware that your country, state or local government may have additional business legislation that you need to follow, such as obtaining a business license or submitting to inspection. Being aware of these requirements will make the whole financial management process clearer for you, and you would also avoid unnecessary penalties and fines.