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Friday, July 25, 2014

6 keys to better management of finances for small businesses

Small business financial management
Clear business plans help optimize and preserve capital
By Phil Steel 

Management of finances is the engine that keeps small businesses running smoothly. That engine needs regular tune-ups to make sure that the business doesn’t fail when the going gets tough. Don’t ignore the clunks. Pop open the hood and discover six keys to better management of finances for small businesses:

1.    Have a clear destination

Ensure you have a business plan, one that is backed up by financial targets, budgets, profit and loss, and cash flow forecasts. That business plan also includes your market differentiation – or unique selling points for why consumers should choose you over a competitor.

Unsurprisingly, those who complete a business plan are more likely to secure a loan, secure investment capital and see growth in their business. If you have a clear destination, you are also less likely to react in a knee-jerk manner to short-term problems.

2.    Know your financial status

Make sure you know how much money you need to make in order to break even and how much you have to spend to run your business on a daily basis. 

Don’t put off paperwork: organize receipts, monitor sales and stocks daily, and keep records up to date weekly. Failing to do this, could mean a mess at tax return time. If your finances are disorganized, you may lose money by forgetting to invoice a customer or by paying interest on an overdue bill.  

Monthly tasks can include reviewing sales against targets and reviewing bills to see where cost savings could be made. Also, make sure you check your accounts payable and the number of days these accounts are outstanding. Sometimes the gap between when money comes into the business (invoices are paid) and money goes out of the business (rent, bills, employees, etc.) can push profitable businesses under. Careful book-keeping and accounting will be your savior.  

3.    Control your stock

Buy only the stock you need, so your working capital is not tied up unnecessarily. According to a 2012 study of small US businesses, poor inventory management is #4 among the reasons why small businesses fail (after lack of experience, insufficient capital and poor location).

4.    Reduce expenditures

You have control over the fixed costs (property, equipment, etc.) so try to reduce them, without reducing customer satisfaction. For example, try working with free and open source software, instead of buying expensive, proprietary software. Or, try virtual meetings via Skype, instead of travelling long distances.

Similarly, avoid large capital expenditures until your business is firmly established. For example, rent a storefront, rather than buy a place. Reimburse mileage for employee car usage at work rather than purchasing a company car. These options help reduce regular business costs and don’t require you to invest large amounts of capital upfront while the business is less secure.

The alternatives, although appealing, may be too big of a big financial risk to small companies in the first few years. Among to the same US study, over-investment in fixed assets is #5 among the top 10 reasons why small businesses fail.

5.    Don’t spend. Invest

Choose where you do spend wisely. Think about whether the purchase will directly help you increase your business or quality of your work. If it does, it might be a worthwhile investment.
Expenses that could help you increase your business include a well-designed website to help you promote your business, a visible blog, a booth at an event where your target audience will be, or smart sponsorships in your community.  

For greater quality at work, you could invest in some help: administrative, financial or service area-related. The result can be increased business productivity and better organization. Attending a conference related to your business can also help increase your focus and give you new product/service ideas and business contacts. Lack of experience is the #1 reason why US small businesses fail. You don’t have to go it alone and you might be better off investing in some help.

6.    Don’t bury your head in the sand

Choose to chase debts and work out taxes so you meet the tax deadline and don’t lose money paying interest. At the first sign of trouble, get financial advice! Don’t even wait until then but seek financial advice at any time from your bank advisor or a financial consultant.


About the author: This article was written by Phil Steel, an outsource consultant  who offer  services like bookkeeping, accounting, audit, payroll management, and much more, for fast growing companies to meet their financial needs.

Image: Pixabay, US-PD