10 Tips for Managing Small Business Finances

10 Tips for Managing Small Business Finances

Two companies. Two intelligent leadership teams, two charged-up teams, and two products with great potential. So how are the two different? The answer lies in efficient financial planning.

Whether you are a first-time entrepreneur or a business owner preparing for an IPO, you are probably aware that there is more to success than maintaining the books in order.

As per a 2019 study,?61%?of small businesses struggle with cash flows. Another survey revealed that?lack of capital or cash flow?was the number one non-pandemic-related challenge for small businesses.?

Important financial decisions must be made right from the launch of your business. There is no transition period. While a few owners of small businesses may have prior business experience or solid financial literacy, many are amateurs.

Top 10 tips for managing small business finances

If you are looking to take your small business to greater heights, here are ten ways to improve small business finances and achieve your company’s best fiscal self.

1. Create a budget.

Creating a budget can completely transform how you handle your small business finances and enable you to meet revenue targets sooner than you think is possible. A budget can enable you to accurately forecast your company’s revenue and even recognise unnecessary expenses.

To begin, you should develop an operating budget that will assist you in projecting revenues for the fiscal year. Even though this is only a high-level summary, it contains all of the critical information about your company’s variable costs, fixed costs, and operating expenses.

Consider the operating budget to be an instrument that informs you if your expenses are on track or not. Next, create a cash flow budget to track how much money is coming in and going out. It will guarantee that you are aware of your company’s liquidity position.

2. Pay yourself

Putting all your money into daily operations can be tempting for small business owners. After all, the extra funds can go a long way toward helping your company’s finances grow. However, if you want your business and personal finances to be in good shape, you must pay yourself. As a business owner, you can pay yourself in two ways: salary and owner’s draw.

With salary, you receive a regular salary as if you were an employee, with taxes deducted from your paycheck. It is required for corporations and limited liability companies (LLCs) that are taxed as corporations.

An owner’s draw allows you to take money from profits as needed. It is not necessary to pay taxes upfront each time you draw, but you should set aside money regularly to budget for your tax bill.

Pay yourself a fixed percentage of your company’s net profit (revenue less all operational expenses). It ensures that you first meet your business obligations, such as paying employees.

3. Invest in growth

In addition to paying yourself, it is critical to save money and look for growth opportunities. It can help your company thrive and move in the right financial direction. Chief financial officers frequently advise business owners to look ahead.

A small business that wants to grow, innovate and attract the best employees must demonstrate a willingness to invest in the future. Customers will appreciate the improved level of service.

Employees will appreciate your investment in the company and their careers. And, in the end, you will add more value to your company than if you spent all of your profits on personal matters.

4. Track your cash flows

One of the most important financial management tools that a small business should closely monitor is the cash flow statement. It gives you a complete picture of the funds entering and leaving your business.

Small businesses may find it difficult to manage their cash flow. Nonetheless, it is useful in providing important data on daily operations, forecasting, monitoring expenses and investments, and numerous other activities central to running a small business.

5.?Go paperless, or at least paper-light

Ditching paper saves you time, money, and heartache when doing taxes. With the growth of cloud-based business tools and remote work, adopting mobile-friendly and paperless (or paper-light) practices has become both easier and more critical.

Of course, much has been done to lessen people’s dependence on paper in the last decade. However, this may be the time you finally stop sifting through stacks of documents in search of invoices, because you probably are not in the office to have access to them.

The usage of paper currency has decreased dramatically. According to a Mastercard survey, 82% of respondents believe contactless payment is a cleaner way to pay in the age of COVID because it allows for faster checkouts, no contact with shared public devices, and more control over physical proximity.

Additionally, going cashless means having a complete electronic trail for retailers and those tracking employee expenses.

6. Separate personal and business funds?

Maintaining separate business and personal accounts is essential for efficient money management. Business bank statements are also useful for tracking the profit margin, reconciling the books, and taking note of your spending habits.

Combining your business and personal accounts can result in disorganised records, which can lead to overspending, missed bill deadlines, and missed growth opportunities.

Monitoring expenses and business fund deposits can be difficult; therefore, keeping two accounts separate is always a good idea. It is at this point that accounting software can assist in sharing the workload and save a headache.

7. Set money aside for taxes

You along with your accountant must calculate how much you earn before interest and taxes (EBIT) once a month. It is simply your monthly revenue minus operating expenses. Next, divide EBIT by 25% to 30% and deposit the result in your business savings account.

This amount should cover state and local income taxes as well as self-employment taxes. Setting money aside each month ensures that you have enough cash on hand to pay quarterly taxes.

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