The financial aspect of running a business is perhaps the most important. Not staying on top of your money, or being unable to understand it, can put you in a bad situation and even contribute to the downfall of a business.
Managing finances can be difficult for first-time business owners, as there is a lot to absorb and understand quickly, such as all the different metrics and ways you can analyze your finances. If you’re running a small business and are struggling with how it all works and are unsure about how to improve your financial management, here are a few tips to help you out.
Educate Yourself
In business, knowledge is power, so to be good at managing your finances you need to learn that aspect inside and out. Getting educated will help you better manage your finances and give you the tools needed to make better financial decisions and interpret your money.
One of the main things that you need to learn are some of the most used financial metrics. Metrics are statistics that tell you how your money is performing, which can then be used to provide better information on your business and inform future decisions. Some key financial metrics include overheads, gross income, and cost per customer, but there are also many other kinds that can help you with your financial management.
Another thing that can be done includes gaining a qualification in finance. This qualification will help you learn the fundamentals of business financial management, but it will also provide a deeper insight into the field so that you can become a specialist and become confident in that aspect of business. You can learn this on a specialised finance MBA program, but there are also other Master of Business Administration courses available that can teach you to become more effective in all aspects of the business.
Be Sure to Pay Yourself
With many small busines owners trying to do everything they can to ensure that their new venture has as much capital as possible, many owners purposely fail to pay themselves a wage.
This is a big mistake as you need to make sure that you are individually well compensated for your time and effort that is spent on the business. You need to make sure that you disassociate yourself from the company you own and treat yourself as another member of staff. This means that you should give yourself all the benefits that entails, such as holidays, a rigid shift, and, of course, a wage so that both your personal and business finances are in good shape. All of these practices can give you peace of mind and improve your own well-being.
This is important: if the business doesn’t work out for any reason, you’ll find yourself personally out of pocket and in a far more difficult position than if you have given yourself a salary. It also makes managing the money a lot easier, so definitely do this.
Invest in Your Business’s Growth
As an individual, it’s important to save so that in the future you’ll be able to buy a car or a house or something that will improve your life. This same mentality is also appropriate for businesses. It’s a good idea to keep money saved up each month and to store that away so that over time you can use it to invest in growth opportunities to boost the business further. Doing this and investing in the right thing can help your business thrive and move in a healthy financial direction.
Good investments differ from business to business; however, they all should either allow you to be more productive, or to reach a wider number of customers. So, in the case of manufacturing industries, for example, these investments could be automation devices such as conveyor belts to increase the speed of production.
When investing, make sure you’re getting the right thing, as you don’t want to waste money on stuff that isn’t going to have a big impact on your operations. That new laptop might seem tempting, but if the investment doesn’t allow your business to do anything it couldn’t do before it, then as a rule of thumb, it’s not a sensible one.
Have a Good Billing Strategy
A business’s finances is all dependent on cashflow. If there is a lot of money flowing into the business at a good rate, then it means that the business can grow, but if there’s a pause in the cashflow, then issues can arise. One of the biggest things that causes cash flow to slow down is clients and customers being late on invoicing and payments.
To keep your finances flowing at a healthy level, you need to figure out ways to minimize these delays and get them to pay effectively. Of course, pestering reminders and phone calls can be a good way; however, over time this may just get annoying for both parties.
Instead, a good option is to incentivize quick payments and you can do this by altering the payment terms to something like ‘2/10 Net 30’. What this means is that if the payment is received within 10 days, the payee will receive a 2% discount. However, if paid after that, then it will be due in full within 30 days.
This small saving can be enough to get people to pay swiftly and thus increase the speed of your cashflow. If you think the terms are too generous, you can always alter them to something like “1/5 Net 20’, meaning a 1% discount if it’s paid within five days, or a full payment due in twenty.
Be Clever with How You Pay Tax
Paying tax every quarter can be difficult for small businesses, as these periods usually mean greater overheads for these specific months. A good tip to make paying tax more manageable is to spread these payments out and make monthly payments instead. This means that you’ll be able to budget more effectively and treat the tax payments like it’s any other monthly operating expense, hopefully making it easier to plan around.
