In the beginning stages of their business, many business owners may wonder how to manage business finances effectively. Unfortunately, with all the moving parts of a business, getting overwhelmed and letting finances take a seat on the back burner is easy.
Thankfully, managing your business finances doesn’t have to be complicated. Keep reading to find out what you’ll need to manage your business finances and how these actions will contribute to a flourishing business.
Cash flow is defined as the money that moves in and out of your business over a set period. Cash comes into your business as income from customers and clients who purchase your goods or services. It leaves your business as expenses, such as rent, equipment payments, or payroll expenses. If you are looking for additional help to manage and track your cash flow Quickbooks and Melio Payments both are great tools to navigate cash flow.
Positive cash flow is when your business receives more income than you pay in expenses. You need to have positive cash flow if you wish to stay in business.
Negative cash flow happens when your business pays more in expenses than you received in income. Businesses may experience this if payment from a client is overdue or they have an unexpected expense.
Negative cash flow only becomes a concern when your business does not quickly return to a state of positive cash flow. To protect your business, it’s best to have a backup form of funding, like a loan or business line of credit, to cover the cash flow shortfall.
Work to understand and keep track of all your business expenses. These expenses will typically fall into two categories:
Cash flow is essential to the health of your small business. Staying on top of your cash flow allows you to plan for the future and make decisions based on your income.
When you tie up cash in purchases or unpaid invoices, you will struggle to pay your bills, putting your beloved business on thin ice.
One of the most crucial periods for cash flow is at the start of your business. You’ll have a lot of expenses but lack the clients or customers to have a regular income stream. During this time, have an external source of cash flow like savings or a loan to keep you afloat.
If your business is seasonal, maintaining a healthy level of cash flow is especially important. If you have a large influx of income at various times of the year, you need to track your cash flow closely to avoid trouble during slower periods.
So, how can you properly manage your cash flow and have a successful business? Implement these practices:
This statement reflects the amount of cash and cash equivalents that come in and out of your business.
Your cash flow forecast estimates the income and expenses your business will incur in the next quarter or year. You can later compare your predictions with your cash flow statement to adjust your business finances accordingly.
What kind of payment terms will your business have? First, you need to choose appropriate payment terms concerning your business. While many businesses take payment immediately, some may allow their clients credit in payment terms of 14, 30, or even 60 days. Although you may attract clients with delayed payments, can your business survive while you’re waiting to get paid? Late payments can result in cash flow problems, so think carefully about the payment terms you decide to offer.
As a small business, you may feel that you can’t afford to turn away customers in the early days. However, some customers could cause your business to suffer huge losses due to late payments or failed organizations.
Before working with a company, perform a credit check with Creditsafe or Experian to view their credit history. If they’re associated with failed companies or have iffy credit, it’s best to avoid working with them.
No matter how airtight a verbal agreement seems to be, you should always use contracts to protect your business. Your contracts should include payment terms, delivery terms, and everything in between. While it may seem time-consuming initially, having these terms in writing can help you avoid problems down the line.
Running your own business required you to get familiar with some accounting and bookkeeping basics. While these tasks may seem tedious, they are instrumental in keeping the financial future of your business safe. Take a look at some of the bookkeeping best practices for small businesses:
To have the best financial planning and forecasting practices, you should have and maintain the following documents regularly:
1. Create a balance sheet: A balance sheet expresses how much your business is worth. If your balance sheet is positive, your business is doing well financially and will continue to grow. It consists of three divisions:While growing your business, it’s almost guaranteed that you will need to manage some form of debt. However, you’ll need to maintain the balance of manageable debts with debt that can cause your business to go under. Here are a few ways you can manage business debt responsibly:
There are plenty of options to secure financing for your business. Here are six popular choices of funding:
Small business loans are great for businesses that need a significant amount of funding at once. Many loans offer excellent terms with low-interest rates. To secure a loan, you’ll need to have a good business credit score, show your business plan, and be in operation for at least a year. Although the approval process can be lengthy, businesses benefit significantly once the loan is secured.
Like a credit card, a business line of credit gives your business a fixed limit of money to use. To qualify, you’ll have to submit financial documents that showcase your annual revenue and cash flow. As long as you make regular payments, you can use this money multiple times.
Solely using a business credit card or charge card to fund your business can be risky. If you fall behind on payments, you’ll see your business credit score take a hit. It’s best to use your business credit card for more minor expenses that you can pay off quickly to build strong business credit.
Grants are money awarded to small businesses from your state, federal, local, or county government. You won’t need to repay grants and can apply for multiple grants. However, keep in mind that grants may have strict guidelines and can take time to process, so start the application process early if you choose to go this route.
With crowdfunding, you show your business idea to a pool of prospective investors. Since you can pitch your idea to multiple investors at one time, it’s a popular way to fast-track financing. In addition, crowd funders don’t expect anything in return. Instead, small businesses will simply reward them with gifts to thank them for their funding.
Venture capitalists are investors who put money into a business in return for a stake in the business. They tend to invest in businesses with high growth potential to get a good return on their investment.
Properly managing your business finances will help you maintain positive cash flow and financial stability. You can feel at ease having a clear picture of your finances every month, empowering you to use these funds to grow your business.
To give you a business management cheat sheet, we’ve put together 13 tips for managing small business finances:
Need funding to grow your business? Get loan offers that meet your specific business needs from several funders through Fundid Capital. Complete your application in as little as 15 minutes and work with a Fundid Advisor to pick the solution that works best for your growth goals. Explore your options.