Being an entrepreneur entails being the Jack of all trades. You have to look after business operations, recruit talent, run marketing campaigns, and manage finances. For someone who doesn’t have number-crunching skills, handling money-related matters can be tricky. You have to track how much money is going out of the business, whether customers pay timely, reliance on credit sales, and much more. After all, no business owner likes being strapped for cash.
Now, the question is, how to stay on top of business finances? The key to handling finances is budgeting and setting goals. Entrepreneurs should create a sound money management plan that tracks expenses and maximizes income. It also includes effective record-keeping to determine where the company stands financially.
Another aspect of financial management includes financing the business. Most entrepreneurs invest capital when starting the business, but you might have to inject additional cash as the business grows. It helps keep the company afloat while streamlining operations. If you are new to this, keep reading.
Here, we have highlighted six tips for managing your business finances.
1. Maintain accurate financial records
Often, business owners don’t pay much attention to record-keeping. They tend to maintain an Excel file with significant transactions, but is that enough? Every business has to prepare financial statements as described by the international accounting body. And for this, you must have a record of all transactions, whether big or small.
If you don’t have any transactional records available, start by hiring a bookkeeper and accountant. A bookkeeper will maintain all records in the trial balance, and the accountant will prepare financial statements. These will provide insight into your business’s financial health, helping you improve its financial standing. Here are three statements you must maintain quarterly.
- Balance sheet reflects the company’s assets and liabilities. If, at any point, the liabilities exceed assets, your business may be on the verge of a liquidity crisis.
- Profit and loss statement gives an overview of your revenue, cost of production, expenses, and profitability. Analyzing this statement will help determine which aspects of your business are loss-making and which are profitable.
- Cash flow statement summarizes cash movements. It shows how much money goes out of the business and how much comes in, reflecting whether you have sufficient cash.
2. Plan and pay business taxes
Every business is liable to pay federal income tax on the income generated. Likewise, you must pay corporate tax if you have registered your business as a limited liability company. But easier said than done. The amount of tax you must pay depends on your business structure, entity, and industry.
Therefore, determining the tax rate applicable to your business is the first step. Depending on your annual income, you can assess which tax bracket applies to you. After that, deduct that tax percentage from your operating profit to calculate profit after tax. More importantly, calculate your tax-deductible expenses like travel bills, utility costs, depreciation charges, etc. It will lower the taxable income, reducing your tax liability.
3. Explore loan options
Is your business suffering from a financial crunch? Despite high revenue and profits, companies suffer financially because they don’t have sufficient cash available. In such circumstances, it is best to explore short-term funding options. You can opt for working capital finance or open a line of credit. It will provide enough money to run day-to-day operations.
However, opt for long-term loans if you need finance for an asset purchase or business expansion. It will provide immediate cash to fulfill business requirements at a market-competitive interest rate. You can repay the loan by making small repayments monthly. But before you opt for any loan, conduct a feasibility analysis. You must calculate the repayment amount, including interest, to determine how much it will add to your expenses. If it drains profits, look for alternatives like renting equipment or outsourcing operations.
4. Maintain healthy business credit
Your business credit score holds immense importance today. It projects your business’s credibility and authenticity in terms of handling credit. In addition, this score also determines if you will qualify for a loan or not. Companies with a credit score of 300-500 find it arduous to acquire funds. That is because lenders don’t trust businesses with low credit. Therefore, regularly check the credit report and ensure you have a high score.
To build your business credit, apply for a business credit card. You can make timely payments and keep the credit utilization rate below 30%. It will show credit lenders you are a responsible business that never defaults on payment. Besides this, clear all your other dues timely, especially if you take loans. It will help improve the credit score, making it easy to acquire funding.
5. Develop a billing strategy
There are always a few customers who don’t pay on time, which leads to problems with cash flow. Instead of sending multiple reminders, consider creating a competent billing strategy. Before you sell, make them sign a contract where payment terms are defined clearly. You can mention the credit timeline and late payment charges.
Moreover, add a few clauses to prompt customers to make timely payments. That could be by offering a cash discount. For example, you can offer your debtors a discount of 2% on their entire amount if they pay within ten days. Likewise, offer them additional products if they pay as soon as the products get delivered. It will entice customers to save a few pennies and clear their payments timely, resolving your cash flow problems.
6. Create a cash reserve
Most companies have a practice of maintaining a general reserve fund. They take out almost 20% of their annual profits and park them in this fund. How about you follow the same practice for your business? A cash reserve can be useful for covering unexpected expenses. It could arise due to a machinery breakdown, production glitch, faulty consignment, or a significant payment delay by a customer.
These things happen when you least expect them; hence, a cash reserve will inject money into the business to keep it afloat. To start this reserve, you must set aside a small percentage of your profits every month. You can open a business savings account and deposit money into this fund. It will offer a return on your investment and keep the money’s value intact throughout the year.
Managing finances has become challenging as the business landscape continues to become complex. It is time entrepreneurs adopt healthy financial habits to handle money-related matters. You can begin by maintaining accurate records and fulfilling the financial obligations that include taxes. It will give an insight into the company’s financial position, which, in turn, you can utilize to track expenses and improve credit. These strategies can go a long way in improving financial health.