Wednesday, February 28, 2024

How to Manage your Finances as a Small Business

Operational costs, capital expenditure, budgets and salary’s – it’s an overwhelming amount of finance to manage.

No business wants to struggle with their cash flow but poor management is definitely common enough to make this issue prevalent with small businesses. In fact, up to 56% of small businesses feel constant cash flow pressure and up to 82% that faced involuntary closure, said finances was the primary factor – it doesn’t matter what industry you are in, without financial management you are bound to fail.

This becomes even more difficult when you have fewer resources but fortunately there are strategies that can help small business owners manage their money successfully and ensure a healthier cash flow.

Keep it digital

You don’t need to completely remove paper from your business, but making majority of your operations digital has numerous benefits. Offices in the U.S alone use 12.1 trillion sheets of paper per year, so it’s not hard to imagine the first upside of removing them from your small business.

Making everything a softcopy not only saves the cost of buying copious amount of paper, but also makes dealing with invoices more simplified. A digital copy mitigates the risk of losing important information because of something being misplaced and also saves time.

Create an invoice folder and add subcategories per common expense. Every time you receive an invoice, move it into its respective folder and you’ll thank yourself during tax time or when working with auditors.

There’s also fewer confusions. When all payments are made electronically your business will have a complete trail of all transaction details.

And if you’re concerned about losing important data, then recognise that it’s simple enough to create cloud-based backups.

Set up a budget

Every expense for your business must have a budget.

Think about it from a fundamental perspective. If you map out all of your expenses, stick to the budget, utilise it for informed decision making and adjust it based on economical or business changes, then what’s stopping you from making the most out of every dollar?

A budget serves an important function for any business – it limits overspending, holds you accountable and helps with decision-making to ensure objectives are achieved while staying within financial means.

Having a comprehensive budget allows business owners to track their spending and income on a regular basis. You will also prevent or minimise unexpected costs because your budget will account for anything in advance and any unanticipated expenses can be quickly identified.

Not only does budgeting require discipline, it also necessitates self-directed learning. Over time, you will learn how to adeptly adjust your finances as the situation warrants and any trends that you notice will guide you in creating forecasts overtime.

Given that we are experiencing an inflation, a budget will facilitate making well-informed decisions regarding investments.

As your financial literacy increases, you will be able to discern when and how to modify your budget in order to save money and maximise profit.

Save for yourself

You want your business to succeed and are willing to spend a significant amount of personal finance to achieve this. Although this is common, it’s important to set aside funds for yourself.

Paying yourself a salary and setting aside cash for retirement should be included in your finance management, regardless of willingness to bear the brunt of operational expenses. As the number of employees under your business increases, so will your output and overhead costs – set aside finance for your future.

Loans

We’re told to stay away from loans.

As a small business owner if you are able to remain operational and profitable without a loan then you’re in a great financial position.

But at the same time, loans can be a great tool for small business owners looking to expand, hire more staff and upgrade equipment.

Loans provide access to capital which would otherwise not be available to many small businesses. Small businesses often do not qualify for traditional bank financing and typically have limited credit histories making them ineligible for large loans.

Luckily, there are many lenders which offer specialised loans designed specifically for small businesses with these limitations in place. Other than offering financial assistance, taking out a loan is often an important step towards establishing business credit history – something that is commonly overlooked.

As payments on the loan are made on time and in full each month, it reflects positively on the owner’s personal credit score as well as their business’s financial standing – this is essential when applying for larger loans down the road.

Loan approval may also depend on how much collateral a business owner has – such as property, inventory or accounts receivable – so entrepreneurs should consider these tangible assets when looking into potential funding options.

Naturally, taking out a loan should always be done carefully and with serious consideration given towards the risks involved. Am I able to pay back the terms on time? Will this loan lead to profitability over time? These are questions small business owners need to ask themselves.

Taking out a loan should always be done carefully and with careful consideration given towards the risks involved – such as defaulting on payments or incurring late payment fees – but if used responsibly it can provide invaluable resources and help businesses expand operations quickly and efficiently while avoiding costly financial missteps along the way.

Spreading tax

It’s generally agreeable that tax is one of the most time consuming and frustrating processes for a business.

Small businesses can manage their tax burden by understanding the different types of taxes they are responsible for, staying on top of any changes to the tax codes and taking advantage of available deductions.

But before we discuss managing tax as a small business owner, don’t forget to keep the following records for five years:

  • Sales receipts
  • Expense invoices
  • Credit card statements
  • Bank statements
  • Employee records including wages, superannuation and tax declarations
  • Vehicle records
  • Asset purchases

Understanding the various taxes that a small business is responsible for is an important part of managing their tax burden. You should also be aware of all the deductions available and take full advantage of them when filing taxes each year.

Deductions can help reduce taxable income by allowing certain expenses to be subtracted from gross income before calculating the amount due. Common deductions include those related to employee expenses such as wages and salaries, rent or mortgage payments for business premises, advertising costs, travel expenses, depreciation on equipment and vehicles used in the course of conducting business activities.

Invest in an expert

We’re not all experts in navigating the finance world but there are many qualified individuals which are. A certified accountant will identify all tax deductibles to ensure you pay less tax and potentially receive a greater return.

These professionals are great to consult with when purchasing any large cost assets and making financial decisions which will impact your business operations. Indeed, it’s initially a cost however the return on investment can’t be ignored, especially if you’re lacking the time or knowledge to maximise your savings. Accountants can also be hired on a pay per use model, which means you don’t need to employ one full time.

Managing funds as a small business is a windy road but using these methods are bound to set you on the right track. 

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Arsen Armstrong

Arsen Armstrong

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