How to Manage Finances on your Small Business

November 10, 2021

A business is only successful if its proprietor knows how to manage its finances. Managing your finances protects you from the nasty shock of discovering your business has little to no cash reserves left. Thus, it’s vital to keep track of every penny that comes into your enterprise. You must know how much you’re paying for expenses versus how much you’re earning every applicable period.

It’s impossible to achieve financial turnaround if you haven’t paid close attention to where your money goes. Prevention is definitely better than cure, so you must regularly keep an eye on and manage your finances. Remember that every penny counts when you’re a small business proprietor.

Bear the below tips in mind if you want to effectively manage finances for your small business.

Digitalize Your Accounting

Small businesses don’t usually attract the best of accounting talents, nor could they afford it with limited cash flow. The best option for you in this case is to invest in a subscription for accounting software.

Using software simplifies the entire process of accounting. You can even do all of the recording yourself. All of the documents that you need to input information for your reports are within your grasp. These include invoices, bills, official receipts, expenses list, and many others. You only use the software to input information, and it will generate the necessary reports for you. With software, every historical information that you need to manage your finances is just a mouse click away.

Software allows you to save money on wages, at least at the beginning. You can postpone hiring accounting staff until you discern that the business is large enough to sustain their salaries. However, make sure to secure the services of an independent accountant at tax time. Filing tax reports requires the skills of an expert to keep the filing accurate and to avoid penalties from the Internal Revenue Service.

Get the best audit and assurance services by Price Bailey so that you can save money on your taxes and also reduce the risk of managing your budget incorrectly. 

Minimize Your Expenses to the Essentials

Small businesses have to keep their expenses lean to keep the cash flow positive. You have to identify which of your operational expenses are actually “essential” and which ones are unnecessary. You should also categorize further which expenses are essential in the long run but can wait until your cash flow is stronger or more stable.

Here are some examples of essential expenses for small businesses that you should prioritize:

  • Utility bills
  • Lease terms
  • Core team salaries and benefits including healthcare
  • Marketing
  • Website management expenses
  • Office supplies and furniture
  • Business insurance
  • Consultancy fees
  • Inventory expenses
  • Travel expenses
  • Debts repayment

Most businesses like to offer other perks to attract talent to apply and work for them. Unfortunately, small businesses can rarely afford those in their early days. These perks are what you can consider as essential but not urgent. You can wait until your cash flow is more stable, or your revenues have grown significantly.

Research Financing Options

Debt repayment is an expense, and you should keep it as low as possible. However, there are many situations that you are justified in taking out loans. For example, you’ll need financing if you want to expand your business in response to rapid growth of revenues. You also need a loan to finance your purchase of an asset like equipment and real estate.

Fortunately, there are various options for financing available. Your job as an entrepreneur is to research as many of these options as possible before you even need them. The goal is readiness. You can save a lot of time when you already know where to go when you need financing. It also saves you from a lot of stress as well.

Here are few examples of small business financing:

  • Invoice factoring and financing

Invoice factoring lets you obtain a cash advance against your invoices’ total value, with the factoring company taking over collection duties. Invoice financing, on the other hand, is a loan secured by your pending invoices that you have to collect to repay the lender.

  • Equipment financing

A form of acquisition loan, equipment financing pays the vendor the full value of your equipment. The lender automatically has a claim over your new hardware as collateral for your loan. They will repossess the gear if you default on your obligation.

  • Inventory loans

This loan allows you to take out a loan based on the value of your inventory as collateral. This is great for retail stores that want to restock their shelves in anticipation of a huge inventory movement.

  • Small Business Administration loans

SBA loans are guaranteed by the government through the Small Business Administration. Qualified applicants can apply for high borrowing amounts but also enjoy comfortable interest rates and repayment terms. These loans are available through SBA-accredited lenders, each of which have varying criteria for qualification.

Know Your Tax Deductions

As mentioned earlier, it’s important that you consult a professional accountant when it comes to filing your business taxes. Only an accountant can spot tax deductions that you would have missed if you did your tax filing on your own. These deductions can free up a significant amount of cash flow.

Here are some tax deductions that are usually overlooked by small business owners during filing:

  • Unpaid loans that your customers owe you
  • Training expenses
  • Startup costs
  • New equipment costs
  • Health insurance premiums
  • Advertising expenses
  • Banking fees including interest rates
  • Lease or rent repayments
  • Financing expenses including interest rates
  • Employee wages and taxes
  • Office maintenance costs

Knowing what you can claim as tax deductions will greatly benefit your cash flow and finances. You get to free up a lot of cash that you can use for your essential operating expenses.

The Bottom Line

Financial management for small businesses is an art form. These enterprises’ cash flows need a fragile balance between its expenses and revenues.

Small business owners will have to know what expenses they can retain, which ones they can postpone or remove, and what they can do to further lower some of those expenditures. They also have to know what options they have if they need to borrow money to boost the cash flow.

Every small business proprietor should attain mastery of their cash flow and finances. This skill is what stands between the failure and success of the business. The longevity of the enterprise depends on this ability.

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