If you want your small business to succeed, you need to know how to manage the financial side of your company effectively. Knowing how to keep your business financially healthy can ensure your long-term success and give you the peace of mind you need.
Continually Invest in Your Business
The moment your business begins to turn a profit, you have a decision to make as to where that money is going to go. There is certainly a temptation for some business owners to put all their profit into their personal checking account, and some people would not think twice about such a decision, but it is not the wisest course of action.
As soon as you are able, you should invest a significant portion of your profits back into the business. This could include spending on equipment replacements or repairs, personnel, marketing, new product ideas, or anything that could promote the success of your business. However, this does not mean that all of your profits should be reinvested.
As soon as it is viable to do so, you should be taking a paycheck yourself. Generally, this should be a modest percentage of your profit margin to make sure you aren’t taking away from your company’s success. Some of the company’s profits should also be secured in a bank account, preferably separate from your own, and left as liquid capital as an emergency fund.
Just like people, businesses sometimes incur unexpected expenses on short notice, and having a windfall is essential to your success.
Manage and Monitor Your Records
Careful financial records are incredibly important no matter what kind of business you are running. The details of what this looks like depends on what kind of business you run, but can include customer payment or invoices, employee paychecks, cost of employee benefits and outgoing payments.
All of this should be carefully tracked in good accounting software. If you are not confident in your own ability to maintain these kinds of records, you may want to consider hiring a professional accountant to do this kind of work.
If your business is large, you may need multiple specialized professionals to work on the collection, payroll, and accounting as separate jobs. If your business is adequately small and you are confident in your ability to handle this yourself, keep in mind that you should always keep up to date on all your payments and follow up on all your invoices as early as possible.
Plan for the Future
As a business owner, you should always be looking ahead to the future to avoid pitfalls and make smart investments. There are many ways to do this, but there are a few simple ways to get started. You should always make sure to plan ahead for taxes. Set money aside early, and either does your research or consult with a tax professional to understand your tax obligations long before the tax deadline looms.
Budgeting is also a huge part of planning ahead. Having a budget to make sure you are not overspending in unnecessary areas, leaving you unable to meet your other obligations.
Projections of your revenue and expenses can help you to plan your budget, especially if the amount of business you are doing is relatively volatile. Creating financial projections can also help you to analyze your current budget and create an updated one that takes into account your expected future finances.
Keep Costs Low
When your business first begins to turn a significant profit, it can be tempting to try to rapidly increase the scale of your business.
Instead of running it from your home, you may want to try to lease some office space, you may want to hire additional staff or purchase new equipment.
However, it is a good idea to keep your costs low at first. New businesses may see rapid shifts in revenue at first, and this is not always very predictable. Creating large, recurring costs, such as rent payments or additional employee salaries can put you in a position where the expenses that were reasonable one month are impossible to pay the next.
Invest in your business wisely, and focus on small costs first, followed by large non-recurring costs before you consider incurring in any recurring costs. Even then, it is wise to remember that your profits may shift during times of economic downturn or other unexpected events, so never push your business budget too far.
Use Credit Wisely
When you launch your business, you may need to incur some debt. You may also find yourself in need of small loans, business credit cards or other lines of credit once your company is already well established.
While qualification for some things may be based on the financial history of your business, others are based on your personal credit history. Because of this, it is important for you to keep your personal credit clean and only use it when it is needed.
If you already have poor credit, you can fix your credit by following certain guidelines or even hiring professionals to assist you.
If your credit history is currently good, you can maintain it by continuing to make regular payments on your open lines of credit such as credit cards, mortgages and other loans. Depending on your personal credit history, you might also benefit from opening new lines of credit, paying off high-interest debt or asking your credit card company to increase your limits.
Managing your finances as an entrepreneur can be a daunting prospect, but it is a worthwhile effort. Planning for the future allows you to set responsible budgets, allowing you to keep your costs low and reasonable while investing back into the business as often as you can.
Monitoring your financial records and keeping up-to-date with incoming and outgoing payments keeps your finances healthy and using lines of credit responsibly while paying your bills on time and in full, both in your personal life and at work, can help you to keep your small business financially healthy.