How to Manage Business Finances 10 Tips for Small Businesses

It can be overwhelming for new owners to figure out how to manage business finances, as there are many components to consider.

Business owners not only have to manage recurring expenses, such as payroll, rent, and overhead costs but must also consider unique, one-time payments, such as acquiring assets.

Understanding how to properly manage business finance is critical for stability, job security, and longevity.

10 Tips for Managing Small Business Finances

While a company's financial needs depend on its business model, there are a few mandatory skills that all owners must have in order to manage funds adequately.

1. Pay the Owners

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When business owners start a business, they are so busy allocating funds to staff, overhead costs, payroll, and inventory that they often forget to pay themselves. Usually, any money that is left over is put toward expansion efforts or saved for an emergency.

While these are great practices, owners must not undervalue their work in the company. In the beginning, owners handle practically everything, from daily operations to final bank runs, which is often supplemented from their own pocket. This causes many founders to be stretched too thin, both emotionally and financially.

Therefore, owners must remember that the business's needs, as well as their own personal financial health, is vital for success.

2. Invest in Expansion

Startups and small businesses need to save extra capital to supplement their future expansion plans. This keeps a uniform mindset moving forward and establishing a common goal across all operations, as it can be easy to get caught up with what is happening today.

Aside from setting a progressive work environment, investing in expansion shows customers that they are passionate about providing the best service. Employees will also appreciate the job security and value of their work in a growing company.

3. Consider Business Loans

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Many small businesses are wary about taking out loans due to the potential repercussions they could experience in the future. However, business loans are great when companies need to purchase assets, such as equipment and vehicles, as long as they generate more income.

Loans can also be used to jumpstart cash flow and ensure recurring financial obligations, such as payroll and inventory purchases, are covered.

4. Prioritize Credit

As a company grows, they often need to acquire commercial real estate, more insurance, and other large assets, which are costly.

As most businesses do not have the funds to supplement these purchases in full, owners must apply for a loan. However, loans with reasonable interest rates require good credit history that shows the organization's financial stability.

To maintain a good credit rating, businesses should make regular payments to their credit lines and pay off debts as soon as possible.

5. Develop a Reliable Billing Strategy

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A major determinant of a business's financial health is its ability to maintain cash flow throughout the year. However, many companies have clients that make late payments, making it difficult to ensure financial stability.

By establishing a convenient, reliable billing strategy, companies can collect payments consistently. For example, businesses can implement a policy that adds interest to the total after 30 days, enforcing timely payments.

Other organizations even incentivize early payments by offering a small discount for customers that pay within the month that the invoice is sent.

6. Make Incremental Tax Payments

Businesses that have trouble making quarterly or yearly payments should consider estimating their monthly payments instead. This allows financial managers to treat taxes as recurring monthly expenses for simple budgeting.

7. Regularly Check the Books

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While monitoring books is often mentioned, it is also often overlooked or put off for the next month. This can lead to significant discrepancies in the future if running totals are incorrect.

Therefore, owners should enforce daily and monthly reviews to ensure all financial information is updated and accurate. Even when using a third-party bookkeeper, this gives stakeholders a better idea of the company's financial performance.

8. Monitor Expenses and Return on Investments

Especially for small businesses, monitoring investments is crucial as it determines what expenses are necessary and contributing to expansion.

Since startups can't afford any unnecessary expenditures, owners should establish a return on investment assessment that measures each expense's value. Anything that does not generate more revenue or contribute to customer happiness should be reevaluated.

9. Create Healthy Financial Habits

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Standardized financial protocols are critical to maintaining up to date information through consistent reviews. Keeping accurate business data mitigates risks, such as fraud, theft, and discrepancies.

Manual bookkeeping is time-consuming and costly, as employees must physically aggregate information from each department.

Therefore, companies should implement management software, such as a point-of-sale (POS) system, that automatically records data from each transaction and updates financial information accordingly. This saves time, resources, and expenses related to maintaining physical paperwork.

10. Plan Ahead

The longevity and stability of a business rely on its ability to plan ahead and anticipate future events, such as-

  • Market trends
  • Sales
  • Customer demand

Forecasting software collects valuable financial information to project future outcomes, enabling businesses to optimize their internal systems. This gives companies a significant competitive edge over organizations that are unable to prepare their operations for emerging trends.