How to manage small business finances: 6 tips for success

Whether you’re a startup founder or an established small business owner, sound financial management is the key to success. Even if your venture turns out profitable, your business will fail without effectively managing your finances. Efficient financial management leads to stability, profit maximization, and sustainable growth. In this article, you’ll learn six tips that’ll help you optimize cash flow, track your expenses, create budget plans and navigate financial challenges like a pro.

1. Prioritize financial statements

Financial Statements are a collection or a summary report providing insight into your small business’s financial health. There are three basic financial statements that should be prioritized:

• The cash flow statement

The cash flow statement shows the amount of cash moving in and out of the business over a period of time. It shows how well the company’s doing and whether it has enough to pay bills and other expenses at the end of the year, quarter, or month. You can optimize your cash flow by simply recording invoices immediately, controlling expenses, and following up on overdue payments to minimize cash flow gaps.

• The income statement

Also known as Profit and Loss Statement, it shows your small business’s revenues, expenses, gains and losses over a period of time. In simple terms, the income statement basically shows your business’s overall financial performance. This statement is vital for your business as it allows investors and lenders whether to invest or lend to you.

• The balance sheet

 The balance sheet shows a snapshot of the business’s finances, such as what you own and what you owe – in other words, your assets, liabilities, and equity (the difference between assets and liabilities). Equity is the amount of money you’ll be left with if you sell off all your business assets and pay all your business debts.  The balance sheet statement is just as crucial as the other two and will help you make an informed decision when faced with financial challenges.

2.  Explore business loan options

Loans lead business owners to think about the financial consequences should their business fail. However, without an influx on your capital you may face substantial challenges such as when trying to purchase machinery or to pay off workers.

There are two types of loans you can take advantage of: Small Business Administration (SBA) Loans and Traditional Loans. SBA loans have longer repayment terms and low interest rates than traditional loans. To learn more about SBA loans and find a lender, click here.

3. Develop an extensive budget plan

Follow these six steps to develop a comprehensive budget plan for your small business:

• Step 1: Separate your business accounts and personal accounts.
• Step 2: Identify revenues and incomes
• Step 3: Determine fixed and variable costs
• Step 4: Record Expenses incurred
• Step 5: Set aside contingency funds for emergencies
• Step 6: Prepare a profit and loss statement to determine the financial health of your business

Apart from these steps, it is a good idea to create realistic goals and set achievable targets to get more out of your business. Another important aspect that should be kept in the account books is taxes. Small businesses in the UK account for 56 percent of the tax gap. So to avoid investigation by HM Revenue & Customs (HMRC), set aside tax money under fixed costs in your statements.

4. Control and track expenses

You can best ensure a successful business by monitoring and controlling your expenses. Keep track of the invoices recorded and purchase only, which is necessary. Maintain good relationships with suppliers and negotiate for better deals or discounts on products or services. Last but not least, follow up on overdue payments which have been made on credit. Being vigilant in this area can help you optimize your cash flow and pay off debts on time.

5. Maintain regular updates

This is where your organizational skills come into play. Maintaining organized financial records and files is essential for compliance and your financial and mental health. Here are some ideas:

• Accounting software: Invest and use accounting softwares that aligns with your business needs. These softwares can help record your income and expenses and generate financial statements and reports for you quickly and efficiently.
• Use IT: With advanced internet technology in your palms, create an e-invoice and e-way billing system for carrying out business operations seamlessly.
• Update accounts: Ensure you regularly update and reconcile your bank statements, credit card statements, and accounting records to identify and solve errors.
• Hire an accountant: If you have the funds, hire an accountant to organize, manage and regularly update your financial records for you.

6. Develop a contingency plan

If you decide to run a small business, you must know the risks involved. These risks can come with unprepared financial hurdles that’ll bring your business down. Therefore, it is better to be proactive and take measures to protect your small business. Here’s how:

• Set aside emergency funds: Set aside a portion of your profits as a reserve fund that can be used during challenging times.
• Diversify your interests: Explore new products, markets, or services to reduce dependence on one revenue source. Research, research, research!
• Create a plan: Develop a plan on how you would respond during a financial crisis such as a recession or unexpected changes in the market.
• Seek professional advice: Seek advice from experienced business owners about their backup strategy and how they responded during a financial challenge.

To sum up

Managing your finances effectively and efficiently is crucial for a successful business. Prioritize your cash flow, track expenses, create comprehensive budget plans, and prepare for unexpected financial hurdles. By following these tips, incorporating them into your specific business needs, seeking professional advice whenever necessary, and doing an extensive research about the market, you can navigate financial challenges and lead your small enterprise toward success in no time.