7 Tips for Managing Small Business Finances

If the pandemic has taught us anything, it’s that proper financial management is essential for surviving a fluctuating economy and competitive industry. As a small business owner, it can be difficult to manage finances while juggling other obligations. But it is necessary if you want your business to prosper. Here are seven tips for managing small business finances. 

1. Learn the basics of finance.

The first place to start is to educate yourself about finance, particularly by learning how to read financial statements. You can also take help from a financial consultany to understand the basic financial functions that you’ll need to run a business. Small business financial statements to begin with are:

• Balance sheet: This provides a summary of what a company owns (assets), what it owes (liabilities), and the amount invested by its owners (shareholder equity). 
• Profit and loss statement: This highlights how much money a business made (revenue), how much it spent (expenses), and whether it incurred a profit or loss during a certain period of time. 
• Cash flow statement: The purpose of this statement is to provide information about a company’s liquidity, cash flows from operating, investing, and financing activities, and their overall cash position over a defined timeframe. 

It can be useful to review these documents to assess the financial health and stability of a company, as well as its ability to fulfill its debt obligations and fund future growth. 

2. Create a separate bank account for your business. 

Tying up personal finances with business ones can cause overspending and make it hard to claim tax deductions. For this reason, it’s advisable to keep your personal and business accounts separate. Open a business checking account, get a corporate credit card, and put related expenses on it. That way, you can keep track of your operational expenditure and stay in control. While you’re at it, consider opening a savings account as well. As you receive payments, you can transfer a small percentage of funds there, building up a significant corpus for tax payments. (More on that later.)

3. Create a business budget. 

Next, make a budget and divide funds for fixed and variable expenses. By doing so, you’ll be able to identify areas where you can save money and avoid unnecessary spending. For instance, if you plan on expanding your team, you can move to a co-working space to save on rental costs. 

To reduce variable expenses: 

• Use free or open-source software
• Conduct virtual meetings instead of traveling
• barter services with other professionals. 

Don’t forget, though: controlling costs is great, but you must do so without compromising customer satisfaction. 

4. Set up a business emergency fund. 

2020 has shown us how important it is to have an emergency fund for unexpected events that can impact business operations. Besides providing financial security, an emergency fund facilitates paying bills on time while keeping your savings untouched. Determining the amount needed for the emergency fund and deciding where to set it up can be tricky. But starting small and dedicating a percentage of monthly revenue can help. Also, create a list of all the situations that may need the emergency funds. 

5. Set aside money for tax payments. 

One aspect of managing business finances involves budgeting for taxes. They are due every quarter, and failing to pay them on time may result in expensive consequences. You can avoid this by spreading out tax payments over the year as a monthly expense. To calculate this amount, multiply your earnings before interest and taxes (EBIT) by 25-30%. Generally, you must set aside 30-40% of business income for federal and state taxes. But, depending on your state finance law, you might have to pay additional taxes such as payroll, sales, franchise, or property taxes. 

6. Streamline your payroll process. 

Payroll is one of the most costly operational aspects of any organization. Still, no matter how tough times are, guaranteeing timely employee payroll is also necessary to keep workplace productivity high. Start by doing a cost analysis of expenses per department and identify areas with unequal distribution of costs. Then, create a spreadsheet of all payroll expenses, including benefits and bonuses. Better yet, invest in payroll processing software to streamline and automate the entire process. Consider integrating it into contract management software to automate new hire enrollment in payroll. 

7. Look into small business loans. 

Many individuals find taking out a loan daunting. This is because a loan repayment usually involves paying back the initial amount plus the interest accrued. During lean times, collateral-free loans can provide the necessary funding to maintain cash flow, buy inventory, and make timely payments. Also, look for options that need minimal documentation and easy eligibility. They are quick and easy to apply, allowing a fast and smooth process. 

Conclusion

According to a business report, 61% of small business owners find it challenging to manage cash flow.The good news is these tips can establish responsible financial habits to stabilize your cash flow and set your business up for success.

Author Bio:

Qurat-ul-Ain Ghazali, aka Annie, is the growth manager at Contractbook and looks after all the organic channels. She has been with tech startups and scaleups for a couple of years with a B2B focus. You can find her socializing, traveling, indulging in extreme sports, and enjoying the local desserts when she is not working.