You likely already know that small business finances are important. But did you know that how well you manage your small business finances could very likely mean the difference between success and failure? That’s right—the number one reason why small businesses fail is cash flow problems. In fact, 82% of small businesses cite this as their reason for shuttering.
That’s why managing your small business finances well is just as important as making a healthy profit in the first place. If you haven’t been on the financial ball, where should a small business owner even begin with tidying up their small business finances?
Here are five far-reaching tips for managing your small business finances so that you can outsmart cash flow woes:
Separate Business and Personal Finances
First, you need to make sure your business finances and your personal finances are separate. This might feel like a drastic or unnecessary move, especially for sole proprietors or businesses in their very early stages.
Setting up a business bank account from the get-go will make managing your business finances that much easier—you won’t spend time separating your expenses line-by-line when filing your quarterly taxes, and you’ll maintain liability protections as well.
Also, consider applying for a business credit card to do your spending on. You’ll be able to leverage your personal credit score to qualify for one, and it will help you to keep your business spending separate from your personal spending, even when you need to spend on credit as a cash flow cushion.
Set Up Your Software and Systems
To manage your small business finances effectively, you’ll need to set up all of your financial systems well. Be intentional about your invoicing software, your point of sale system, and/or your billing processes. How will you make sure your clients and customers can pay your small business easily and quickly? How can you only pay for what you use while enjoying convenient provisions like an online phone number? These questions define the structure and backbone of your business capability.
If you run a service-based business, you can likely access solid invoicing and billing through top-tier small business accounting software. Otherwise, if you run a retail business, you’ll also need to acquire a POS system for your checkout counter or a payment gateway for your small business website.
Optimize Spending
Running a small business will involve a fair amount of spending, no matter how thrifty you are with overhead costs. And skimping too much on these overhead costs might mean your small business won’t be able to take off. That said, monitoring your small business spending, no matter how much you spend, is crucial.
As much as you can, keep track of the return on investment, or ROI, for each dollar you spend. Make sure that every dollar you invest in your business is rendering a return. And if you see a negative ROI on any capital you spent for your small business, think about where you can move that spending so that it eventually provides a return.
For instance, say you run a bakery, and you’ve come up with a recipe for savory anchovy pies. You decide to start small and only invest $50 total on the ingredients for a test round of anchovy pies. The ingredients you buy render 50 pies, which you sell for $5 a pop. After selling only 5, and having to throw the leftovers away because they went bad, you see that the test wasn’t exactly a success.
Because you only earned $25 from the test round and spent $50 on the ingredients, you have a -50% ROI. Luckily, because you started out small, you’ve learned—without losing too much money—that investing in anchovy pies isn’t optimal for your bakery.
As a result of the test, you take what you would have spent on the anchovy pies and move that spending over to your cinnamon roll ingredient budget, because those fly off the shelves every morning.
Start Saving Early
Once your business is up and running and the capital starts to flow, it’s prudent to start thinking about saving. Business savings accounts allow small businesses to earn their capital over time. Plus, they allow you to store your capital in a semi-liquid form so that you can access it without delay or incurring penalties.
In the early stages of saving, try to avoid non-liquid accounts like certificates of deposit, which will charge you a fee if you need to access your capital earlier than expected. A small business savings account will provide the perfect balance between interest-earning and liquidity for new small businesses that want to save for a rainy day.
Monitor Cash Flow
Now that you’ve set up all of this crucial small business financial infrastructure, the last step is completely on you. You’ve got the necessary tools to track your small business’s cash flow down to the cent. Now it’s time to do it.
Keep tabs on all of your intended small business purchases and expenses, and ensure that you have enough income, savings, or credit before you move forward with them. Use your business accounts, your accounting software, and your spending optimizations to make sure that your small business finances are in the best shape possible.
ABOUT THE AUTHOR
Eric Goldschein is an editor and writer at Fundera, where small business owners can find expert insights and tailored financial options such as business loans or business credit cards. He writes extensively on financing, marketing, entrepreneurship, and small business trends.
