Guest article provided by: delesign.com
Running a business has both risks and rewards. Whether you are still starting or already have an established business, managing business finances is an essential part of the trade.
What Is Small Business Financial Management?
Financial management for a business helps you see if your business is making a profit or not. It gives you both an overview and specific details on the financial situation of your business.
Managing business finances is more than just knowing how much revenue or the total amount you have on your bank account. In a business, there are several aspects that you need to look into, so you can properly manage your finances.
How Do You Manage Business Finance?
1. Create a Financial Plan
Smart financial planning is one of the primary aspects of managing business finances, especially at the beginning of a business.
Planning your business finances gives you a direction on how to achieve your goals. Some of the aspects to include in financial planning are as follows.
- Assets such as available resources or equipment
- How to manage business risk and any applicable insurance?
- The balance sheet of your business
- Liquidity or access to cash or funding
- What will be your method of keeping financial records?
Depending on the size of your business, you can add other elements based on how you operate.
If you need professional help, a Certified Financial Planner or a Chartered Financial Analyst can guide you in having a sound financial plan. The registered financial planner can map out ways to leverage your business investment. Refer to the Certified Financial Planner Board of Standards website to check if the financial planner is certified and verify that they are in good standing in their profession.
The planning stage of your business finances builds a solid foundation for the strategic growth of your business. Likewise, having a concrete plan will give you enough hindsight to prevent failures from happening.
2. Identify Your Business and Personal Finances
To avoid confusion in spending, it is integral that you separate business finances from personal finances.
Provide a proper label on which counts as an expense for your business and which one belongs for personal consumption. There are several benefits to separating the business and personal finances, such as:
- Accounting records – you will find it easier to manage listing down relevant expenses in the bookkeeping requirements.
- Business taxes – you can be specific about which expenses or income should be accounted for in business when paying taxes. Mixing personal and business income may lead to paying higher taxes. Consequently, you could be missing out on tax deductions and incentives to take advantage.
- Legal implications – personal finances are protected when they are separated. If the business faces a lawsuit, only business assets will go into consolidation. In the U.S., it is common to establish a Limited Liability Company so that owners and other company members will not be responsible for business-related claims and damages. Several states also allow an individual to set up asset protection trusts.
To split up your finances, create separate bank accounts for your business and personal funds. Set a budget on how much you are willing to spend for either business or own purchases, and strictly adhere to them.
Draw a clear distinction on which credit cards and loans will go for personal spending or which goes towards the business to be more effective in managing business finances.
3. Optimize Your Cash Flow
Apart from accounting for the money coming into your business, you also have to check the expenses or the money coming out. You will need to have a proper balance between the two.
While you may be seeing a large amount of money coming in from your revenues, your expenses might be eating up a large share of your earnings. There are several ways to have a manageable cash flow, such as:
- Rent or leasing for purchases that will require a large amount, such as commercial properties.
- Pay in installment instead of paying in full for expensive equipment, taking advantage of zero or lower interest rates.
- Calculate overhead rate, taking into account the fixed and variable costs.
- Monitor the direct and indirect business expenses.
- Enticing clients to pay earlier by providing them discounts or rebates.
- Forward invoices on time to collect payment immediately.
Once you have a balanced look at the costs and operating margins, it is easier to leverage various financial services to grow your business.
4. Manage Inventory and Supply Chain
Overseeing your inventory and controlling purchase orders from suppliers should be given attention in your business.
When dealing with an inventory spanning thousands of SKUs across several product categories, it can be tricky to identify which specific item provides profit and which one you may need to stop selling.
Improve the accuracy when doing inventory to spot lapses on lacking or excess supplies. Having an excess inventory can lead to items that only occupy space and do not make a profit. Excess inventory also holds 25% to 32% additional costs annually from storage to insurance.
Implement a multichannel approach to selling to get your inventory moving. Provide several options for the customers to buy, such as online or in-store. It also helps to forecast demand whenever possible to meet the surge in demand for an item or which inventory will sell less in a certain period.
To manage your inventory efficiently and accurately, you can automate the process with inventory management software. Inventory platforms cost anywhere from $71 to upwards of $499 as starting fee per month. There is also free software available for small businesses to use for their inventory.
5. Strategy When Paying Bills and Taxes
While it is a routine already for most businesses, paying for bills and government taxes is one area where you can build a sound financial strategy.
For one, institutions that you are indebted to pay for bills such as credit cards, loans, and utilities have penalties for late payments. Depending on the territory of your business, the same goes for government fees and taxes.
Penalties for late payments are an unnecessary expense that you need to remove from your business. Take a look at some of the typical fees and penalties:
- For late tax payments, it will cost you 0.5% up to a maximum of 25% of the unpaid tax amount. It starts from the due date until the date that you pay.
- Paying credit card bills late will carry a fee of $29 for the first instance and even up to $45 for succeeding violations.
When compounded, these charges increase your business expenditures, which you are trying to reduce in managing business finances.
To avoid missing out on recurring payments, set bills with fixed amounts to an automatic deduction. Alternatively, a monthly reminder will help you remember to pay, thus avoiding exorbitant late fees.
6. Knowing How Business Accounting Works
Understanding business accounting may seem daunting at first. However, even basic financial knowledge of what goes on in your balance sheets is already vital for your business.
There is no need to have the same level of detailed knowledge as accounting professionals do. Nonetheless, reading accounting statements and understanding the terms will give you a more concrete basis when making critical financial decisions.
To get started, be knowledgeable on at least the fundamentals, such as:
- Balance sheet – what the terms such as assets, liability, and equity means for your business.
- Difference between cash and accrual method – essential when recording purchases. The cash method will only record a sale after payment, while the accrual method immediately puts them in the books once the transaction is confirmed. Both have their pros and cons.
Business accounting still has several other important terms which you need to understand for the business to operate.
Hiring either a bookkeeper or certified public accountant can help do the groundwork of your books, financial planning, and the whole aspect of managing business finances. A CPA can provide full accounting services tailor-fit for the business, whereas a bookkeeper can handle the daily functions of recording business transactions.
7. Grow Your Business Thru Loans
Debt is not necessarily bad. On the contrary, a loan or debt is a strategy to fund the growth of your business.
There is a big difference between good loans and bad loans. Using loans to finance a significant business purchase turns the loan into a valuable investment vehicle for business expansion. What makes loans or debt a risky endeavor is when you use them for non-essential purchases that will not contribute to your business. Thoroughly evaluate the loan proceeds before getting one.
In growing your business, there are cases where you need a large amount, such as buying equipment to increase your manufacturing capacity. When you do not have enough funds, getting a loan or line of credit will benefit your business.
To qualify for a business loan, here are a few of the usual requirements from banks and lenders:
- Cash flow statement
- Credit score
- Assets or collaterals
- Business plan
Aside from the lender reviewing your business loan application, these aspects of your business also have other purposes. They are a snapshot of how well you are managing business finances properly.
Writer’s Bio:
Raffy Montehermoso
Raffy is a content writer for the graphic design service Delesign. He is involved in SEO and digital marketing. He gravitates towards upcoming technologies, startups, and is an avid learner.