With a growing business, you must streamline all the operations and grasp new opportunities for expansion. It requires managing your company finances to maximize success.
A small business can be a sole proprietorship, a partnership, or a privately-owned company. When compared to the entire industry, the size and revenue generation capacity of a small business is relatively lower. Recent research revealed that there are currently more than 30 million small businesses operating within the U.S.
No matter what the size of the business, it requires proper financial management to survive the cut-throat competition and volatile economy. For a small business, this is indeed a challenging task because it’s during the expansion phase that companies launch products or introduce new technology to maximize profits.
To become a successful small business, an entrepreneur must avoid all financial pitfalls amidst the risks involved. That’s where the need for a financial structure arises, which must be credible enough to generate profits.
Small Business Challenges
A small business faces several challenges due to its small size and low revenue generation capacity. As the above chart suggests, 82% of small businesses fail because they are unable to cope with their cashflows. In other words, they are unable to take care of their finances. So, properly managing finances is one of the fundamental aspects of running a successful small business.
Any business – big or small – depends on the skills and experience required to provide services and products. These are the core business skills without which no successful business can flourish. The importance of financial management in the entire setup cannot be discounted either.
The chart below serves as the barometer for how small businesses rate their financial situation. As seen, in the year 2014, only 5% of the small business thought that their financial condition was excellent.
Managing Small Business Finances
Timely Receipt of Bills
A small business has less working capital. That means it is essential to manage business cashflows correctly. If the company has a sizeable amount of money tied up with clients in the form of ending invoices, it means that there is less working capital.
Unfortunately, every business has some chronic defaulters. These customers never pay their bills on time despite reminders and personal visits. If you have such customers, it is time to get tough with them because if you don’t, they will eventually bring down your business.
Offer them a 2-5% discount on the gross payable if they are willing to pay the entire outstanding amount within a fortnight. Otherwise, receive the full amount and discontinue your relationship.
Proper Bookkeeping
Proper bookkeeping is a must for every kind of business undertaking, even if it is a charitable organization. You can hire a professional accountant for this purpose. The books prepared by the accountant should be reviewed comprehensively within a specified time frame, say at the end each month.
It not only keeps you abreast of the financial situation of the company but allows you to resolve any financial issues that may arise proactively.
Reviewing bank reconciliation statements at month end is a must. It will enable you to see the bank transactions in a summarized form.
Taxation Management
Despite agreeing that taxation management lies at the core of finance, small businesses fail to tackle this issue properly. The chart below summarizes five common tax-related mistakes made by small business.
Tax filing obligations differ from business to business. If you do not file returns quarterly, it does not mean that you leave it to the last minute.
Preparing returns at the eleventh hour will be a hectic affair which may compel you to forego a few tax-deductible items simply because you failed to note them down at the appropriate time. It may increase your tax liability. If you choose to hire a professional for this purpose, their fee will be an added burden on your business.
What you need to do is always keep a record of all your expenses and revenues. Online tracking software can help business owners keep tabs on important financial documents. Cloud-based software will automatically handle invoicing as well as bookkeeping needs.
Many software platforms can prepare your tax returns if you provide proper input. Purchasing any such software will also allow you to gauge the financial viability of your business at any given time.
Reinvesting in the Business
There is little chance of growth if you don’t reinvest profits into the business. A key aspect of successful financial management is to keep investing in your business so that it continues to grow and thrive.
One of the reasons why a small business becomes successful is that its owner believes in its perpetuity. This phenomenon can be achieved through periodic reinvestment into the company from the profits earned through its activities. Reinvestment paves the way for expansion and diversification – the two pillars of successful business growth.
There are times when the company doesn’t generate enough returns. That’s the time when you may raise business capital through financing techniques. If you don’t qualify for a bank loan, there are alternative financing options. You can opt for short-term loans like Southern Finance Loans or long-term loans for buying office equipment through equity financing.
Controlling Expenses
For every small business owner, knowing where to invest their cash is mandatory. Though some expenses are necessary, some can be controlled.
To manage finances, you must keep track of all your business expenses. Analyze if the recurring costs are adding value to your business or not.
You can discontinue the added expenses and spend your money in more appropriate areas. For instance, if you’re spending too much on recruitment purposes, you can cut those expenses and spend that money on buying machinery that will enhance your production.
Cost of Doing Business
Comprehensive financial management for small businesses requires periodic reviews of the costs incurred for delivering goods/services. It is the direct cost of doing business.
There are other indirect costs involved in operating a business. These include office rent or salaries of the support staff, including the accountant and IT personnel. All these figures add up to make up the cost of doing business.
If a single factor goes up, your entire cost will go up, increasing your overall costs. It will hurt your bottom-line profit.
The Wrap Up
Operating a small business is a thrilling experience. On the flip side, it can become a headache if the finances of the organization are not in order. There is no reason why you and your business should suffer because of financial mismanagement. Keeping the above tips in mind, you are sure to run your business productively without much hassle.
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