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Managing your small business finances can be tricky, especially when the business starts to accelerate and you increase your capacity, custom, product lines or employees. There is an urgent requirement for all business owners to manage and stay in control of their finances to ensure the business has everything it needs and a good cash flow to sustain it and allow you to run the company as you need to.
Managing finances doesn’t come easy to everyone, and small business owners undoubtedly have many things to juggle during their working day and in their personal lives. Having your attention pulled too far in too many different directions can lead to mistakes, and financial mistakes can be costly all around.
Pay Yourself
This is important. You can’t use company funds to dip into instead of paying yourself. Plus, once you get into the habit of not drawing a wage, it becomes harder to justify the expense. And you need money to live on.
Suppose you don’t already pay yourself a realistic wage for the work you are doing. While it is essential to get the business up and running initially, so is having a regular income stream for yourself. So work out what a fair wage is for your work and put yourself on the payroll.
Separate Accounts
This is something that cannot be emphasised enough. Open a company checking account and a separate account for short-term investments (a savings or money market account). If you combine your funds, it will be a mess when it comes time to file your taxes.
Any business transactions that flow via your personal accounts, and any private transactions that flow through your company accounts, should be avoided. You must comply with this requirement if your company is established as an LLC or corporation, but you must abide by it even if you are a sole owner.
You will find that managing your small business finances is a lot easier if you do not have to dig data out of your personal accounts first.
Streamline Your Expenses
You need to know what you are paying for throughout the course of the month. Be it finding cheaper mobile phone contracts for yourself or employees, company cars, reimbursements and of course supplies and equipment.
Always be on the lookout for how you can reduce your business expenses by finding better deals and adapting to money-saving measures such as using more sustainable practices (going fully digital, automatic lighting), paying only for what you need (smaller office you allow for remote working) and reducing wasteful practises within the company by improving efficiency.
Improved efficiency within your company can help you to get more done during the day, thus reducing employee overtime and giving your time back. You can streamline how you work by making sure you’re employing the best technology. To allow for everyone to work easier and reduce waste during the working day.
Create A Budget
Creating an annual budget for your company is critical in ensuring that you can manage your money successfully throughout the year. A budget serves as a guide, allowing you to plan ahead of time and make specific business decisions. It also aids in the development of business expansion strategies.
Additionally, you should set aside some time to review your income and expenditures in order to adjust your spending patterns and make your money work harder and smarter for you.
Automate Payments
It’s practically impossible for any business owner to track when each payment is due. Manually processing payments consumes a significant amount of time and energy, diverting your attention and concentration away from your essential company tasks.
Therefore, it only makes sense to automate bill payments and take a hands-off approach to the payment process. Use internet banking to automate all of your expenses, whether it’s for your credit card or your utility bills, and to ensure that your accounts have enough funds to cover all of your obligations. Taking this step can also assist you in avoiding late payment penalties while saving you time and energy.
Keep A Good Credit Score
Credit scores are used by various financial institutions, suppliers, business partners, and even prospective customers to assess a company’s creditworthiness. A strong credit score contributes to the establishment of goodwill for a company. It provides them with an indication of whether or not you are likely to default on your obligations.
If you keep your credit score in excellent standing, you will be able to increase your company’s financial performance. To succeed in business, every company must learn how to overcome a negative credit score.
Don’t Be Scared of Credit
Credit has its place for every business. Don’t be scared of taking out a company credit card or loan to support your growth when needed. Even if you only use it sparingly or pay it off in full each time you use it. Building an excellent financial history for your company can help you get more favourable rates and support by responsibly using the credit available to you.
Prepare for Taxes in Advance
If you or your accountant want to know how much money you have earned before interest and taxes, you should calculate it every month (EBIT). This is just the difference between your monthly revenue and your monthly operational expenses. Calculate the amount of EBIT by a factor of 25 percent to 30 percent and deposit it into your business savings or money market account.
This sum should be sufficient to cover state and municipal income taxes, as well as self-employment taxes, among other things (however, your amount may vary, so be sure to check with your tax advisor). Maintaining a regular monthly cash reserve ensures that you have enough funds on hand to complete your quarterly tax payments on time.
Measure ROI
Measuring expenditures and return on investment can provide you with a clear picture of which investments are worthwhile and which ones are not. Small business owners are advised to exercise caution when it comes to where they spend their money.
Make sure to pay attention to the return on investment (ROI) associated with each of your expenses. You should be aware of where your hard-earned money is being spent and how that investment is performing. If it isn’t paying off, cut back on it and invest a little more in the beneficial initiatives to you and your organisation. If you don’t do this, you risk losing money on wagers that are either irrelevant or lousy investments.
Pay off Debts Quickly
A business’s financial health will never be improved by carrying over loans from one financial year to the following financial year. Creating a well-thought-out debt repayment strategy before taking out loans is the best course of action. Make it a top priority to settle any outstanding business debts as soon as possible. It also helps you get a better handle on your finances, reduce interest payments, and impact profits when you enter a new financial year.
Consider A Bad Debt Fund
From time to time, you may experience bad debtors in relation to having invoices settled or outstanding payments due to other client’s or vendors’ financial issues. A bad debt contingency fund can act as a savings account for those times when you cannot afford to swallow up the losses caused by non-payers. While you need to do everything within your capabilities to get some or all of the outstanding monies paid, it isn’t always possible. With more and more small businesses folding due to covid, there is a greater risk of you struggling as a knock-on of this.
Reassess your fund and how frequently you have used it throughout the year to ensure it is topped up. If you find it isn’t enough, you can increase it to levels that can help support you the next financial year.
Consult Financial Experts
Even though handling finances is an essential component of running a business, it is not usually a strong point for business owners to have. If accounting, bookkeeping, and financial management are not your cup of tea, you should seek the assistance of a qualified accounting professional. Instead of hesitating or spending excessive time worrying about it, you can engage a professional to complete the task for you.
In conclusion
Whether you choose to take care of your business finances yourself or have someone care for you, you must be aware of your cash flow and what expenses you incur every day, week or month. Mistakes can be made if proper care and attention are neglected when it comes to your finances.
So find a filing and organisation system that works for your company and is kept up to date at all times to make sure that you know exactly where you stand and what your options are with regards to keeping on top of payments, investing more into different areas of the business and your relationships with vendors, thanks to being able to keep on top of your expenses.
You may also like: 4 Simple Tips for Organising Your Company’s Finances
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