An entrepreneur’s life is a busy one. The average entrepreneur has to wear multiple hats when attending to their business. One moment, you might be dealing with an operational issue, and another might bring a challenge in a customer-facing process.
The U.S Bureau of Labor Statistics estimates that 20% of small business startups fail in the first year. While many factors contribute to this result, there’s no doubt that financial mismanagement plays a huge role in business failure.
Managing your business’ finances well is a matter of creating good processes. Here are 5 processes that will help you demystify your cash flow.
Projecting your business’ expenses and modeling incoming cash flow is an essential skill every entrepreneur must have. Every financial decision you take for your business is driven by your budget. Note that a budget doesn’t have to be restrictive. It can function as a framework that helps you make good financial decisions.
For instance, you could create fixed expense categories and require your team to follow them rigorously. Alternatively, you could allow for some flexibility in each spending category up to a defined tolerance limit. Generally speaking, it’s best to build some tolerance into spending since you never know how expenses will arrive.
Make sure you track all of your expenses against their relevant budget categories. This exercise will help you create better budgets down the road. You’ll also figure out which lines of fundraising are best for your business.
As an entrepreneur, client payments are your business’ lifeline. Without client payments, there’s nothing that will keep the lights on and your employees paid. Credit cycles in certain industries and payment collection difficulties make it tough for entrepreneurs to manage their business and collect payment.
Hence, it makes sense to simplify invoicing as much as possible. For starters, use templates for creating invoices so that you aren’t spending time creating them from scratch. Once they’re created, use an electronic solution that offers your clients multiple ways to pay.
These solutions also allow you to send payment reminders, offer early payment discounts, and follow dispute resolution on a line-by-line basis. By automating much of the payment cycle, you’ll save time following up on clerical tasks. In addition, you’ll automatically create strong audit trails that make dispute tracking easy.
Look to simplify your billing processes as much as possible, and you’ll save time and collect payments faster.
Handle Taxes Early
There are few things more frustrating than having to pay your taxes. However, the government will always collect what it’s owed, and there’s no avoiding them. Instead of waiting for the last minute to get your taxes in order, start working on them incrementally throughout the year.
A good way of ensuring you always have money to pay taxes is to set aside money every month for them. If you’ve incorporated as a corporation you’ll probably have to do this by default. However, sole proprietors can also benefit by following this practice.
Many entrepreneurs believe they can handle taxes by writing off a bunch of expenses and lowering their tax bills to match what they have in the bank. Unfortunately, all this does is throw your taxes into chaos and increases your chances of being audited exponentially.
Work on taxes incrementally throughout the year, document all expenses, and you’ll find that filing your taxes when the time comes will be a breeze.
Hire Out Tasks
While entrepreneurs need to wear different hats when running their business, don’t assume you need to be an expert at everything. Time management is essential as a business owner, and the best way to manage your time is to hire professionals to execute tasks you aren’t an expert at.
For instance, the average entrepreneur knows a lot about taxes but is not an expert on them by any means. Hiring an accountant to file your taxes, highlight the credits you qualify for, and the deductions you can reasonably take is a great financial decision. The money you pay them will more than come back to you when they help you save money.
Similarly, social media marketing,content creation, and immigration law are specialized fields that require an expert. Hire the right employees or consultants, and they’ll make you more money than what you pay them.
Always Have Cash
Cash is essential when running a business. You never know when business conditions will change and push you in the red. Much like an emergency fund is essential when managing personal finances, every business should have cash in the bank to account for working capital shortfalls or emergency expenses.
Generally, it’s a good idea to estimate how much money you’ll need in an emergency and multiply that number by 6 or 10, depending on the amount of risk you’re willing to bear. For instance, if you think your business will need $5,000 to handle an emergency, it’s a good idea to have $30,000 sitting in the bank as cash.
This gives you a good buffer and ironically allows you to take calculated risks in your business since you have a decent cushion to fall back on should things not work out.
Simple, but not Easy
Managing your business’ finances is simple, but it isn’t the easiest thing to do. The key is to follow these 5 processes to ensure you’re never without emergency cover. Manage your finances well, and you’re almost guaranteed to grow your business over time.