Tips for Managing Small Business Finances

Starting your own business endeavour is certainly a challenging task. Though the alluring prospects of doing what you love to do have many wide-reaching benefits, it also has its own set of challenges. Managing small business finances tops the list of all of those challenges. Financial management decision can make or break any potentially viable enterprise.

How Sound Financial Management Helps Your Business?

Appropriate financial management ensures your business generates a steady stream of revenues for a sustainable period of time. Thus it re-affirms the going concern aspect of the business. Furthermore, startups must be able to effectively manage their credit obligations, tax obligations, other expenses and must be able to sustain through unforeseen financial challenges.

For example, current COVID-19 pandemic imposed a truly unprecedented challenge for businesses. According to a study by researchers at the University of Illinois, Harvard Business School, Harvard University and the University of Chicago, it is projected by economists that since the start of the pandemic in March more than 100,000 small businesses had to permanently shut down their operations till date. Additionally, one of the recent survey conducted from 9 May to 11 May at least 2% of the small businesses had to shut their operations permanently.

Moreover, small businesses working in a few specific sectors are more susceptible to get closed down permanently.

Though pandemic is a very unique scenario and its risks corresponding to it are far rarer. However, it has exposed loopholes in the operations of small businesses and underlined the importance of having sound financial management.

Managing Financing Options

Conventional ways to acquire financing for small businesses include equity financing, debt financing and business capital loans.

Equity Financing

The equity funding can be acquired through venture capitalists and angel investors. The primary benefit of equity funding is that one does not have to repay investors in the event that the company goes bankrupt. However, in exchange of funds enterprises have to give away a share of ownership of your company. Enterprises with high growth potential may choose the option of equity financing.

Debt Financing

The source of debt financing is to raise funds by selling debt instruments to institutional investors or individual investors. Additionally, you can secure small business funding from friends, family, persona credit cards and small lenders. The duration to repay debt may vary according to the respective lenders. However, failure to pay the loan amount may lead to loss of assets that were pledged as the security at the time of securing finances. Thus excessive debt financing may lead to bankruptcy.

Startup Business Loan

Businesses can take a loan from banks to carry out operations. Moreover, governments in various countries have different schemes for startups to raise the necessary funds. These loans are issued availed at lower interest rates. 

Tips For Managing Finances For Small Enterprises

Track Cash Flows

Managing cash flows is about keeping track of money going in and out of your company. Businesses need to maintain positive cash flow, in order for them to survive in the long run. Positive cash flow indicates that your business generates revenue in excess of expenditure. The way to assess which things are contributing towards increasing cash is to regularly review the company’s cash flow statements, whether monthly or quarterly or yearly. You can use such analysis to do the necessary adjustments to generate better stream if income. It is prudent for seasonal companies to track cash flows on a monthly basis. Additionally, this strategy enables enterprises to stay on top of its bills and indicates that it is well equipped to tackle unexpected expenditures.

Manage Your Debts

Debt control is an important aspect of small business finance management. You would not want to have a debt that gets out of your control and you won’t be able to raise funds to fulfill those obligations. However, a too cautious approach won’t help you either. Thus manage your debts smartly. One way to minimize debt is to build other aspects of business stronger. Create strategies to boost your sales, use comparatively cheaper ways of marketing such as digital marketing, cut down on unnecessary costs etc. you can identify activities where you can reduce spending or completely eliminate those activities. On the other hand, you can cut down raw material costs by negotiating with your suppliers and persuading them to provide raw materials at a discounted rate. Additionally, you can set up a fund where you can park some of your income in order to use it later in the event of an emergency. This strategy ensures that you have some backup in case of an unprecedented challenge.

Regularly Produce and Maintain Statutory Financial Statements

Company’s balance sheet gives you an understanding of its overall financial position. Balance sheets are also useful to provide a snapshot of your business to banks or prospective clients. Another most important statement is the profit and loss statement. This statement includes net profit or loss generated by a business for a given period as compared to the same period the previous year. They can be used to create profit and loss projections for the future period. A third important document is a cash flow statement. It provides you with figures of generated revenues.

Get Hold of Accounting Basics

It is a statutory requirement for businesses to have a separate bank account than that of proprietor’s bank account. However, it makes the job easier for accountants to keep track of all the finances.

Furthermore, to make the process even easier, opt for good quality accounting software. Today markets are flooded with various advanced accounting software, you can choose any that satisfies your business’s unique requirements. Make sure you choose software that not only automates tasks for you but also simplifies them. It will save much of your time.

Moreover, stay ahead of your tax liabilities. Timely payment of taxes relives some of the burdens of the enterprises’ finances.

Use Your Funds Effectively

The ultimate goal of financial management is to ensure that companies use their funds effectively so that they can maintain and achieve greater growth in the future. Make wise decisions and achieve the desired growth.