While many attribute the success of an economy to large businesses, it turns out that small and medium enterprises are just as important, if not more. According to the World Bank, such firms account for a whopping 90 percent of businesses and employ 50 percent of the global workforce.
Therefore, the success of your small business is much more important than you think! However, the fact remains that small businesses do have to overcome many challenges – a major one being related to their finances.
As per SEMRush, 66 percent of small businesses experience financial challenges. Another independent study by Fundera revealed that over 70 percent of such businesses have outstanding debt. To avoid falling into the trap of reduced cash flow and increased debt, it is imperative to manage your finances efficiently from the get-go. Here are five easy ways to do so.
1. Use accounting software for automating tasks
Rather than relying on manual bookkeeping, it is much better to automate as many financial processes as possible. This is because seldom can small businesses afford to hire a dedicated finance department to handle the various tedious tasks of the department.
Probably, the most you can do is hire one or two resources.
And effective bookkeeping, budgeting, and money management cannot solely be done by a few people. You need to provide them with the right resource in terms of online accounting software for small businesses. Not to mention that using such software allow for greater transparency.
You can track the different processes first-hand, thereby leaving no room for errors and frauds. You certainly won’t be alone in using automation software! According to GoRemotely, 64.4 percent of small businesses use accounting software to streamline the various accounting processes. You can choose from a wide range of accounting software like Freshbooks.
2. Develop a workable budget
Are you unsure about where your money is going? To streamline the process, think about it all in advance. Do so by creating a budget and sticking with it. By developing a budget, you can visualize exactly where your money will go and where money will come from in your business.
Do so by creating a list of all the monthly income sources of your business. This can include sales revenue, investment interests or rental income, etc. Then, create a list of all the expenses you must make. Include inventory purchase, taxes, utilities, debt payments, insurance premiums in it. Also, if you have a separate marketing and business development department, you must allocate a budget.
Within each department, ask them to further assign spending to different activities. For instance, your marketing team should know how much they plan on spending on influencer marketing vs. traditional print. Once you have created this budget, you must see if you truly stood by it at the end of the month. In case of excess, see where you spent more than required and reevaluate your expenses.
3. Gain an understanding of your cash flow
A US bank study revealed that a staggering 82 percent of businesses tend to go under solely because of cash flow issues! This means you might be making money in the form of revenue, but your business can still fail if you don’t manage your cash flow correctly.
What is cash flow? It is the money that flows in and out of your business. At any given time, the money coming in should surpass money going out.
To manage your finances, create a cash flow statement. This will help you in understanding what amount of cash is spent for what purpose. This will prevent overspending and overdrafts at bank accounts. Similarly, know when your money has to go out in the form of debt payments and utilities.
Here are some ways you can improve your cash flow:
Collect your receivables on time. Offer electronic payment options to ensure faster payments. Be proactive and anticipate your future cash needs in advance.
Automate your account payable processes to avoid missing out on any invoices.
Outsource certain functions, like IT, accounting, and human resources, to save cost.
4. Maintain a good credit score
There is only so far you can go through personal finances and bootstrapping! In a world where 29 percent of small businesses fail due to a lack of capital, you will soon find yourself looking for financing options. And for getting loans, you need to maintain a good credit score. This cannot be achieved overnight. You need to portray good financial habits from the get-go.
For instance, you must be punctual with your debt payments, pay your utilities and other bills on time. Don’t let your credit cards run a balance for over a few weeks. This is because if you don’t pay your payables on time, your credit score suffers, reducing your chance of getting a loan.
And even if you do get a loan, your interest rate will be high since credit providers consider you a high-risk investment. So, showcase positive credit habits and only seek the type of funding which you are affirmative you can easily repay.
5. Pay yourself!
Often, small business owners treat their businesses like their children and refuse to compensate until they bring in huge profits. We understand that you might feel that every penny counts when trying to grow your business.
However, your personal finances need to be in good shape as well. Only then can you weather the bad days. Not to mention that you need a safety net in case things go sour! Therefore, manage your finances as well as your businesses’ well. Don’t miss out on your payday.
6. Ending Remarks
In the current landscape, being a small business can seem frightening. As more and more businesses are closing down owing to the ongoing pandemic, you need to put on your best fight. Don’t let finances be the reason for the failure of your small business.
Manage them from day one. This way, you can put at least one of your worries to rest and focus on bringing in revenue!