Business finance is roughly defined as the money you need to start, run, or expand your business. There’s always money coming in (for example, from sales of goods and services, loans, and grants) and money going out (for example, to suppliers, payroll, and loan repayments). How you manage your small business finances will determine whether your business will make it to the next year or not.
With the threat of a recession looming over us, I know many small business owners are wondering what they can do to improve their financial situation. One of the best ways to do that is by paying attention to your cash management. If you’re wondering how to better manage your small business finances, read on for my advice.
3 Tips to Better Manage Your Small Business Finances
There is a lot that can be said about small business finances. While this article just skims the surface, I believe these are three of the most important things small business owners should keep in mind.
1. Reach Out for Help
The first thing you should know is that you don’t have to go it alone when managing your small business finances. You can and should reach out for help. Business finances are too important not to get outside help from an expert.
Who you hire will depend on many factors, including how big your business is, how complicated your taxes are, and the specific areas where you need the most help. Some options include:
- Bookkeeper: A bookkeeper processes and records financial transactions in your business. This may include recording sales and expenses, reconciling bank accounts, paying bills, sending invoices, tracking inventory, and maintaining documents such as purchase receipts. A good bookkeeper will also provide a few basic financial reports, such as the monthly profit and loss statement, balance sheet, and statement of cash flows.
- CPA: A Certified Public Accountant (CPA) is an accountant licensed by the state. They typically focus on accounting and tax matters, including keeping and auditing financial records, preparing financial statements, ensuring compliance with tax laws, and preparing and filing taxes. For tips on choosing an accountant, check out this article.
- CFO: A Chief Financial Officer (CFO) focuses on overall financial management and financial strategy. They provide guidance to help set financial objectives, make financial decisions, prepare budgets and forecasts, establish policies and procedures, and strategize how to improve financial performance.
Whether you need help with daily transactions, financial overviews and taxes, or financial strategy, help is available to you. And remember, you don’t need to create a full-time position for these roles—you can always outsource according to your needs.
2. Never Neglect Your Credit
As a business owner, you need to pay attention to two types of credit: your personal credit and your business credit. Generally speaking, you should have a clear distinction between the two. However, your business and personal credit may remain linked to some extent, which is why you must take care of both.
Your personal credit is connected to you by your social security number and is summarized by a credit score ranging from 300 to 850. Here is how the scores are interpreted:
- Under 579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
Meanwhile, your business credit is connected to you by your EIN (Employer Identification Number) or Tax ID Number. There is no equivalent scoring system for business credit, but the same things affect how your credit is viewed, including how you pay your bills and how much debt you carry.
As a small business owner, it’s up to you to guard your personal credit while establishing your separate business credit. Managing your small business finances will be a lot easier when you keep the two separate! So here are some tips on building business credit:
- Establish your business legally as a sole proprietorship, corporation, partnership, or limited liability company.
- Create a legal name for your business.
- Set up a business phone number.
- Register your business with your secretary of state.
- Get an employer identification number (EIN).
- Open a business bank account.
- Build relationships with vendors.
- Get and use a business credit card.
- Pay your bills early and often to show you can make good on your debts.
3. Be Strategic with Cash Flow
When managing small business finances, you’ll need to be strategic about your cash flow—the money that comes into your business and the money that goes out.
In terms of the money that is coming into your business, you may consider:
- Offering incentives for early or fast payments.
- Offering pre-payment rewards and benefits.
- Raising prices to keep up with inflation.
- Creating additional revenue streams.
In terms of money going out of your business, look for ways to reduce your spending. For example, you may want to look at all positions in your business to see how and if each person you hire gives you a return. Some questions you may ask are:
- Is this person providing value?
- How much do they really cost?
- What is their growth potential?
- Can this job be outsourced instead?
As a business owner, those are hard questions to answer, but they can help you clear out inefficiencies (and save costs in the meantime).
In addition to costs for employees, you’ll want to pay attention to vendor costs and how that impacts your cash flow. For example, if you pay a vendor in advance but there are delays in the shipment (like during the global pandemic), you may be sitting without the cash or the inventory for weeks and sometimes months. Understanding how each element of your business impacts cash flow will enable you to better manage your small business finances.
Your Small Business Finance Tips
There is so much more I could say about small business finances, but these three items rank up there in terms of what I think small business owners should focus on right now as we flirt with the next economic downturn. If you have other small business finance tips that have helped your business, I’d love to hear them! Please share them with the community by posting a comment below.