Sound financial management is the cornerstone of all enterprises regardless of size. Without it, even successful and possibly lucrative businesses will collapse.
Some small business owners might have previous business management expertise or good financial literacy, but many are still novices. Get resources and consult experts to help you with the important decisions and financial responsibilities you'll have to do.
The guide is divided into three sections. Each of these will help you navigate a key stage in the financial growth of a small business.
Managing and monitoring small business cash flow
The money that enters and leaves your company over a given period is referred to as cash flow.
The company continuously has money that is coming in and going out. It enters the company as revenues from goods and services. Rent, salaries, monthly loan payments, and supplier payments are expenditures or the monies that leave the company.
Why do small businesses need cash flow? One of the main causes of company failure is lack of capital. If you have past-due, unpaid invoices and unable to pay debts, or even the most prosperous enterprises, may find themselves in trouble.
In the early stages of business, cash flow can be one of the most challenging issues because of lots of expenses and there are no clients yet or consumers to generate cash. It's critical to think of cash flow position at the outset. Have a short-term source of funds, such as savings or an overdraft to cover the expenses while waiting for the money to come.
Identify fundamentals of small business accounting
There are lots of time-consuming but necessary bookkeeping, tax, and accounting chores that come with having your own business. These activities may be aggravating, but they are necessary to not only keep your company secure and compliant with tax laws, but also to produce useful information that you can utilise to operate your company successfully.
Here are the essentials of small business accounting that you must handle:
Open a separate current account for your business. Legally, every company must maintain a separate business bank account. Although it is not legally needed for sole proprietors to open a separate company account, doing so will help you avoid major headaches later on and make it simpler to manage your funds.
When selecting your business account, analyse the transaction costs, withdrawal fees, introductory incentives, administrative features, and the quality of customer care that is offered.
Select a cloud-based accounting programme. Except for the tiniest companies, almost all make investments in cloud accounting software. For business owners who prefer not to hire a professional, cloud accounting software can be the ideal answer. Cloud accounting software is frequently utilised in combination with a qualified small business accountant to ensure that the company's accounting and tax duties are handled properly.
Small business financial planning and forecasting
In any small firm, financial paperwork is essential in tracking internal revenue and spending, and it shows the company's viability to investors and lenders. Keeping up with financial planning and forecasts will help spot possible problems before they happen and provide information on how to run the company.
Every small business owner should create and maintain four primary financial planning and forecasting documents.
Balance Sheet provides the company's financial situation at any given time. There are three components of balance sheet:
Assets are the stuff that the company owns such as machinery, vehicles and buildings.
Liabilities are the amounts owed by a company such as bank loans, debts to suppliers, etc.
Equity is the sum that the business owners have contributed.
The net worth of a company can be determined using these three pieces of financial data. A positive balance on the balance sheet means that the total value of the company's assets exceeds the sum of its obligations, and equity indicates that your small business is based on sound financial principles.
The balance sheet also provides a clear picture of the business financing to outside parties like banks and potential investors. Liabilities will be worth more if you lack equity.
A statement of profit and loss - The business' annual income and expenses are summarised in a profit and loss statement. You may determine your net profit or loss in a certain period. Your ability to track your profitability and identify the break-even point (the amount of income needed to cover all operating costs) depends on maintaining an accurate profit and loss statement.
Making profit and loss estimates for upcoming years can be extremely helpful for your business. You can get a sense of how your company is likely to do in the coming months and years by creating three alternative profit and loss forecasts based on the best-case, worst-case, and most likely scenarios. If you predict that the company will turn a solid profit, you can invest in new equipment, personnel, or research and development (R&D) initiatives. Think about cost-cutting initiatives if your projection shows poor profit levels.
A break-even evaluation - The number of units you must sell or the amount of revenue you must generate is determined using a break-even analysis. It's common for small businesses to experience losses in their early years of operation. On the other hand, if a company struggles to break even over a longer period, it may not be financially viable. By calculating the break-even point, you may assess a potential business expansion or new project and determine whether your pricing is too high or your costs are too low.
Conclusion
Make financial management the core of your company. The small business' financial management shouldn't be neglected, if you want your business to succeed. You must make it a key component of your plan. Understanding the metrics that drive your company's operations will help make better decisions and determine when to expand or implement cost-cutting initiatives.