How to Successfully Manage Your Small Business Finances
It is vital for any business to have a continuous cash flow, which is why you need to keep a close eye on your finances. After all, you may need to invest some of your profits back into the business or keep a cash reserve in case an unexpected debt arises.
However, what steps can you take to ensure that your business operations don’t run out of cash? Nishi Patel, Managing Director at Northants Accounting provides some insight below on how to ensure the financial side of your business runs smoothly.
1. Keep track of your income and expenses
Knowing the accurate figures for your revenues and costs is crucial. If you intend to do the books yourself, it is wise to use accounting software. However, hiring a bookkeeper or an accountant will give you more time to run your business. Either option will enable you discover how much you’re earning and see where the money is going.
2. Prepare financial projections
In any business plan, a financial projection of your operations is crucial so that you can anticipate and address any possible future difficulties. It can also help you secure loans and creditors.
3. Make every sale count through invoicing
It is good business practice to send your invoices promptly once you have provided your goods or services. Unless otherwise agreed, set the payment terms to one week – that way, neither you nor your customer will forget the transaction.
If the customer doesn’t reply, make sure you follow up on your invoices. It would also be easier if you could create a template for your emails or SMS follow-ups. Once you receive the payment, remember to cross-reference it with the invoice number.
4. Keep costs down
Even if your revenue starts to grow, it is still wise to remain prudent in your spending. Set as low a salary as possible and find ways to reduce your expenses.
For example, if you travel a lot, avoid luxury hotels. Consider your accommodation as simply a place to get a good night’s sleep or a place to rest after a business meeting. To make it easier, plan the trip as if you’re paying for it personally.
Keeping your personal and business accounts separate
1. Maintain separate bank accounts
It’s not a good idea to mix your personal finances with your business funds. It is much better to separate the two to spare you the headache of tracing unaccountable losses or expenses.
2. Record all personal loans made to your business
It’s normal for company owners to give personal loans to their business, especially if it’s still in the early stages. If you do this, you must keep an accurate record of such loans. Once the company starts becoming profitable, you can start collecting on those loans plus any interest due.
3. Pay yourself first
You don’t have to pay yourself all the profits but you should think about starting with 10% of the income. Consider it as a salary for running the business. This will also serve as a test of your business profitability. However, don’t forget to set aside some of the revenue just in case some unforeseen expenses arise.
Small businesses, especially those that are just starting out, often don’t have sufficient capital. In fact, it’s essential to have enough funds so that you can cover both your business and personal expenses for the first three months of trading. However, you need to account for them separately. Even if the company starts making money, maintain that buffer. You can use it to keep your business running in case there’s a delay in revenue collection.