Prudently managing finances in any small business will definitely yield results. You simply need the right strategies to keep your business profitable while avoiding all other pitfalls. The business tips here will resonate with you! This guide will take you through essential tips to help you master financial management in small business.
So, what is financial management?
Financial management involves activities of planning, organizing, and controlling finances in your business. The goal here is to ensure you have the money that can cover expenses while also assuring you for future growth. Financial management in small businesses is a lifeline for sustainability.
Why is financial management important for small businesses?
The actions you take in your small business can either make or break your business. Any business decision revolves around financial management! You can acquire funding, avoid penalties, and also make better decisions when you have your financial strategies working. It is in the public domain that 67.7% of small businesses in any broad range of industry survive the first 2 years. A small percentage of small businesses survive to the 15-year mark. SBA approximates it at 25.6% based on the research that covered periods from 1994 to 2020.
It is clear from this research that small businesses do face serious survival issues! Poor financial management remains one of the challenges that faces small businesses. It underscores the importance of financial management to increase the chances of survival.
5 Essential Tips for Effective Small Business Financial Management
Let’s dive into the essential tips that every small business owner should employ to run a successful enterprise.
1. There is a big difference between personal and business finances
Most small business owners make the mistake of using the same account for both personal and business finances! Set aside money for business in a separate business account. A bank account will ensure that you keep clear records that will make your tax season a breeze.
2. Create and Stick to a Budget
A budget is a tool that allows you to appropriately allocate resources to areas that matter. A budget gaps many challenges, including overspending and keeping your revenue on track. Furthermore, a budget will ensure that you categorize your expenses properly while keeping your records in a manner that is auditable.
3. Closely monitor your cashflows
Without a cash flow management model, your business is as good as death. Remember, cashflows are the lifeblood of every business, and therefore, tracking them is mandatory! Come up with a model that can track your expenses on a weekly, monthly, or even quarterly to annual basis. It helps you know how much money is flowing into and out of your business. Furthermore, it plays a role in managing cash shortfalls, hence encouraging better business decisions.
4. Implement ERP accounting software
Most small businesses still use manual books for record-keeping. While it can still serve the purpose, it is prudent to note that times have changed. Investing in accounting software simplifies all the tasks, such as invoicing, expense tracking, and payroll. There are quite a number of ERP software programs that can serve the purpose, including QuickBooks, Xero, and even MHL ERP. The ERP software is time-saving, error-free, and cheap.
5. Your small business needs an emergency fund
Unexpected expenses occur in all sectors of life, and so a small business is not an exception. You need an emergency fund that will take care of emergencies that may arise in the cause of your business. Saving at least 6 months’ worth of your operating expenses in your emergency fund gives you leverage in seasons of uncertainty.
Common Financial Management Mistakes to Avoid
Avoiding financial management mistakes assure the success of a business. Here are a few financial mistakes that might be ruining the success prospects of your business!
- Over-reliance on credit: While credit at times can be a strategy to gap tax expenses, it sometimes works against the business. When operating in seasons of high interest rates, your interest on credit is too high. That, in essence, will cause you to pay more to finance your debts. Credit should be a strategic tool rather than being the sole financier of your business.
- Pay your taxes: Most small businesses forget that tax is an obligation, and they fail to set aside money for the same. Tax penalties are normally punitive, and unfortunately, many small businesses fail after being imposed on tax penalties just due to noncompliance.
- Ignoring Financial Reports: The majority of small businesses fail to compile financial reports. A financial report shows where your money is going and general business performance. To be on top of your business activities, you should regularly review your financial statements.
The Role of Financial Management in Securing Funding
Financial management in small businesses is also a tool for securing funds. If your goal is to secure funds in the future or you intend to attract more investors in the future, you should seriously manage your finances. Any investor will be looking at your business health before making a decision to invest in your business. Lenders will want to be sure that you have a good record of financials before they decide to lend you money. You increase your chances of securing the funding you need to grow by keeping good financial records.
About 29% of small businesses fail to secure funding because of their bad financial practices. It is therefore prudent for every small business to keep healthy financial records to ease the process of acquiring funds.
Tips to Help Small Businesses Improve Their Financial Management Practices
You don’t need a degree to effectively manage your finances! Fortunately, these simple steps will help you achieve your small business financial management goals:
1. Take an Online Course
You can dedicate just an hour each day to learn valuable financial management tips. There are many free courses on bookkeeping, cash flow management, and budgeting available on websites like Coursera and Udemy.
2. Consult a Financial Expert
A financial consultant can tailor solutions that specifically fit your business needs. You will never go wrong by seeking insights from a professional, as they can help your business reap greater rewards.
3. Stay Updated with Financial Best Practices
We live in a dynamic world that presents us with new opportunities every day. Therefore, it’s crucial to stay informed about the latest developments in taxes, interest rates, and government policies. You can achieve this by subscribing to financial literacy platforms, reading business magazines, and following any other sources that provide essential financial news.
Also Read: Creating Personal Budget 2024
Final Thoughts
Do you want your business to be healthy and profitable? It takes both responsibility and accountability to truly reap the fruits of success. Furthermore, you need to avoid common mistakes, continually work on your skills, and always consult experts when you encounter challenges. Taxes and debts often present significant hurdles for small business owners, and it is in these areas where you will greatly benefit from expert advice.
Additionally, stay aware of the fact that financial management plays a vertebral role in your business’s success. By remaining proactive, you can avoid financial pitfalls that may spell doom for your business success.
