How Should Small Businesses Approach Financial Management
Managing finances is one of the crucial responsibilities of small business owners. But it can be a bit challenging at first. You need to be able to consider the financial consequences of your decisions – changes in the cash flow, profit and other financial conditions of your business. Every department has its own set of activities, and each and every one of them impacts the financial performance of a business. As such, small business owners must control and evaluate them accordingly.
Usually, a business is successful because of the skills it brings into the making of the product or providing a service. When someone is inexperienced with managing finances, it may look daunting to him and he may end up with developing bad financial habits that could one day ruin the business.
If you educate yourself and develop some basic skills needed for financial management, you can create a stable financial future for your company. Here are several bits of advice you should adhere to if you wish to approach your financial management in the right way.
Grow good financial habits in yourself
Establish internal financial protocols, starting from simple ones such as blocking the outset time to review and update financial information. This will go a long way in securing your small business’s financial health. Watching finances carefully will let you mitigate risks, fraud, and any other negative financial consequences.
As a small business owner, you are probably always low on money, time and have lesser technological capabilities than your competitors. But this shouldn’t discourage you from developing and implementing some kind of internal control. This is particularly true if you have workers under your care. Inadequate financial internal protocols often lead to employee theft or fraud, which can ultimately create legal issues if your employees or you aren’t following some laws.
Normal operations and financial management
In its day-to-day operations, a business provides service or product, makes a sale to its client, cashes in and begins the process anew. Financial management here is about moving money through this cycle in an efficient manner. In other words, selling to clients and collecting the receivables on time, controlling the turnover ratio of the raw materials and the finished goods inventories, the turnover ratio of total and fixed assets and starting everything over again. Simultaneously your business must pay its overhead costs, employees and suppliers. For everything here, you must use money, so you need to make the cash flow smoothly.
Although economies often go up and the market becomes a bull market, there is also the other side of the coin where markets experience decline and become a bear market. You need to prepare in advance and have enough liquidity to endure such hard times, or you may end up with shutting down your business for good because there isn’t enough cash to go around.
Debtor management is fundamental for effective cash flow in your business and for ensuring your company has enough working capital to grow and reinvest. The cash flow management process needs to be as strong as possible to ensure a company is in good health while expanding. Otherwise, you leave your finances vulnerable.
Small businesses often fail to create an appropriate debtor management system. While most enterprises begin with tallying debtor days, this is a crucial first step on the right path and a key performance indicator that companies should monitor.
Your invoices should meet your client’s format requirements. Develop a monthly aged debtors analysis. Ensure that payment arrangements with debtors are always written on paper. When you have overdue payments, communicate with the debtor as soon as possible to confirm that they have received their invoices.
Remember to pay yourself
When you own a small company, it’s easy to forget yourself and invest everything in daily operations. It’s intuitive to think that all that extra investments will pay off in the long term and help your company expand. But don’t ignore your own role in the business and compensate yourself for the work you have done. Your personal and business finances need to be in balance.
Most small business owners forget about paying themselves and believe it is better to keep the enterprise up and running and pay employees on time. But if the company fails, you end up with a minus on your bank account. Rediscover that you belong to your company as well and that you should pay yourself as much as you pay the others.
In conclusion. These are just some of the best pieces of advice we’ve collected for you. There are other things to watch out for, like monitoring your books, having a good billing strategy, focusing on expenditures and spreading out your tax payments. Be careful in your approach to financial management. Control and watch your finances and your business will be thankful for it.