Running a small business often requires you to excel in creating a great product or delivering a valuable service. However, managing finances is an equally important aspect of ensuring your business’s success. If financial management isn’t your area of expertise, it might feel overwhelming, but it’s essential for the survival and growth of your business. Here’s a guide to building strong financial habits to set your business up for long-term success.
Practical Steps for Managing Your Small Business Finances
Here are some actions you can take as a small business owner to keep your finances in order:
1. Pay Yourself a Salary
When you’re running a small or midsize business, it can be tempting to reinvest all your earnings into the company. However, Alexander Lowry, professor and director of the Financial Analysis Program at Gordon College, emphasizes the importance of compensating yourself appropriately.
“Many small business owners neglect to pay themselves in the early stages,” he said. “They focus on paying others and growing the business, but this can leave them with nothing if the business doesn’t succeed. Remember, you are an integral part of the company and deserve to be paid.”
2. Invest in Growth
Setting aside funds for growth opportunities is key to ensuring your business thrives. Edgar Collado, COO at Tobias Financial Advisors, suggests looking toward the future.
“A growing business that invests in innovation and its employees sends a strong message to customers and staff,” Collado said. “It creates value and lays the foundation for long-term success.”
3. Don’t Fear Loans
While taking out a loan can feel risky, it’s often necessary to purchase equipment, expand your team, or improve cash flow. The right loan terms can support your business without placing an undue burden on your finances.
4. Maintain Strong Business Credit
As your business grows, maintaining good credit becomes increasingly important. Paying off debts promptly and avoiding high-interest loans can help you secure funding when you need it. Strong credit opens the door to new opportunities, such as purchasing property or expanding operations.
5. Develop a Reliable Billing Process
Late payments from customers can lead to cash flow issues. Consider creative strategies, such as offering small discounts for early payments, to encourage prompt invoice settlements.
“Unpaid invoices can create serious financial problems,” said James Stefurak, managing editor of Invoice Factoring Guide. “Providing incentives for early payments can keep your cash flow healthy and avoid constant reminders to clients.”
6. Spread Out Tax Payments
Managing taxes can be challenging, but breaking them into monthly payments can make them feel more manageable. Michele Etzel, owner of Bayside Accounting Services, recommends treating taxes like a regular monthly expense to reduce stress and ensure on-time payments.
7. Regularly Review Your Financial Records
Even if you work with a bookkeeper, take time to review your financial records regularly. Doing so helps you stay informed and can uncover potential issues like overspending or fraud.
“Set aside time to reconcile bank statements and review outstanding invoices,” advised Terence Channon, principal of NewLead LLC. “Neglecting this step can lead to costly mistakes or even legal troubles.”
8. Evaluate Spending and ROI
Carefully track how your investments are performing. Deborah Sweeney, CEO of MyCorporation, suggests that monitoring return on investment (ROI) is critical.
“Spending without evaluating ROI can waste valuable resources,” Sweeney said. “Prioritize initiatives that deliver tangible benefits for your business.”
9. Build Sound Financial Habits
Establish clear financial processes to safeguard your business. Simple measures like scheduling regular financial reviews can help detect fraud or inefficiencies early on.
“Even small businesses with limited resources can implement effective internal controls,” said Collado. “This is especially important when you have employees handling your finances.”
10. Plan for the Future
Short-term priorities often take center stage, but looking ahead is crucial. “If you’re not planning five to ten years into the future, you’re falling behind,” said Tina Gosnold, founder of Set Free Bookkeeping.
Key Takeaway
Effective financial management for small businesses involves paying yourself a fair salary, managing cash flow, paying down debt promptly, and planning for future growth.
Understanding Business Funding Options
Managing your finances isn’t just about how you spend money but also about how you secure it. Business funding generally falls into two categories:
Debt Funding
This involves taking loans that must be repaid with interest, such as bank loans, credit lines, and business credit cards. Debt funding provides quick access to capital, though repayment is required regardless of business success.
Equity Funding
Equity funding doesn’t require repayment, but it often involves giving investors a say in your company’s decisions. Examples include venture capital, angel investors, and equity crowdfunding.
Tip: Debt funding typically involves traditional loans with repayment terms, while equity funding trades financial risk for shared control over your business.
Why Financial Management Matters
The foundation of any successful business lies in sound financial practices. By understanding basic accounting, managing cash flow, and planning for growth, you can avoid pitfalls and ensure a stable future. When in doubt, consult financial experts while maintaining control over your company’s daily financial operations.
