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How to Manage Your Business Finances Effectively

By on November 29, 2021 7 min read
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How to Manage Your Business Finances Effectively

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.

Manage and Track Your Cash Flow

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 vs. Negative 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. 

Understand and Track All of Your Business Expenses

Work to understand and keep track of all your business expenses. These expenses will typically fall into two categories:

  • Direct and Indirect business expenses: Direct business expenses are costs involved in the production of a good or service (labor, materials, supplies), while indirect business expenses are costs are general business expenses (equipment, utility expenses) that help keep you in operation.
  • Overhead costs: These are the costs unrelated to direct and indirect business expenses. They are costs you must pay to stay in business, regardless of the goods or services provided. 
    • Fixed: Expenses that remain the same every month (ex. rent)
    • Variable: Expenses that increase or decrease depending on how busy your business is (ex. commission-based employees)
    • Semi-Variable: Expenses you incur regardless of how busy the business is but may increase during busier periods. (ex. icing bags at a bakery during the holiday season)

Why Is Cash Flow Important for Small Businesses?

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. 

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How to Manage Your Cash Flow

So, how can you properly manage your cash flow and have a successful business? Implement these practices:

Create a Cash Flow Statement 

This statement reflects the amount of cash and cash equivalents that come in and out of your business. 

Produce a Cash Flow Forecast 

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.

Choosing Appropriate Payment Terms

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. 

Vet Potential Customers

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.

Always Use Contracts

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. 

Learn Accounting Basics

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:

Bookkeeping Best Practices for Small Business

  1. Educate yourself on tax obligations: Find out what tax obligations your business has. Get your EIN from the IRS and set up payroll for employees. 
  2. Open a separate business bank account: Open a business bank account early on to keep business and personal finances separate right from the start. This will also help you to separate your personal and business credit scores
  3. Choose an accounting platform that works for you: There are several cloud-based accounting platforms on the market to choose from. Find the one you like the best and stick with it. 
  4. Keep up with your bookkeeping: Once you’ve chosen your accounting platform, stay on top of your finances. Falling behind in your bookkeeping can result in mismanagement of funds. 
  5. Consider hiring a bookkeeper or an accountant: As your business grows, you’ll have less time to dedicate to your bookkeeping. When this happens, consider hiring a bookkeeper or accountant to keep your finances in check. 

Financial Planning and Forecasting

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: 
a. Assets: The things your business owns that hold value (equipment, real estate, cash/cash equivalents)
b. Liabilities: Money your business owes (rent, payroll expenses, loans, equipment payments)
c. Equity: The amount you’ve invested into your business (Assets - Liability = Equity)
 
2. Profit and Loss statements: These statements summarize your revenue, costs, and expenses over a period, whether quarterly or annually. The figures from these statements help small businesses to get a complete financial picture of their company and can be used to seek funding in the future.
 
3. Cashflow statement: Understanding cash flow is crucial to the financial success of your business. This document shows the influx of revenue and the outflow of expenses of your business. In addition, it reflects what cash was spent and for what purpose. 

4. Break-even analysis: Your breakeven analysis helps you determine the amount of revenue it will take for your business to cover your total costs. This is called the break-even point. At this point, you have never made a profit or incurred a loss. 

Manage Business Debt

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:

  1. Avoid unnecessary costs or overspending: Cut out unnecessary costs that won’t impact your ability to run your business. 
  2. Review your fixed and variable costs regularly: Review your fixed and variable expenses every month to keep spending low and look for ways to save.
  3. Create a business emergency fund: Create an emergency rainy day fund for unexpected expenses. Use extra money at the end of each month to add to this fund and only use it for unforeseen costs. 
  4. Increase revenue: Are there simple ways you can increase your income? For example, consider renting out extra space in your building or offer a payment plan discount to attract customers.
  5. Negotiate with vendors: If you place bulk orders, negotiate with vendors to get a cheaper rate,
  6. Boost business credit score: Boost your business credit score by increasing the number of positive payment reports on file or lowering your credit utilization rate.
  7. Consider refinancing any loans: If you have loans at rates higher than the current market of interest, refinance your loan for one with lower monthly payments. 

Understand Finance and Funding Options

There are plenty of options to secure financing for your business. Here are six popular choices of funding: 

Business Loans

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.

Business Line of Credit

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.

Business Credit Card or Charge Card

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

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. 

Crowdfunding

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. 

Investors/Venture Capitalists

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. 

The Importance of Managing Your Business Finances

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. 

13 Tips for Managing Small Business Finances

To give you a business management cheat sheet, we’ve put together 13 tips for managing small business finances:

  1. Prioritize business financial planning from the start. 
  2. Get your finances organized.
  3. Pay yourself when you pay your employees. 
  4. Invest in the growth of your business.
  5. Don’t be afraid to take out a loan or line of credit to fund your business growth.
  6. Establish and monitor your business credit score.
  7. Stay on top of your bills and payments.
  8. Be mindful of tax payments and create a payment plan.
  9. Make time to manage and monitor your books.
  10. Track and measure ROI.
  11. Review expenses regularly.
  12. Plan ahead for unexpected events. 
  13. Get help if you need it. 

Manage Business Finances Effectively to Ensure Success

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

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Fundid is driven by a mission to empower business owners on their growth journeys by simplifying business finance & access to capital. 

We spend our time thinking about what the world would look like if the 80% of businesses that have under 10 employees had access to the capital they needed to grow and thrive. We're solving this with our Business Capital, Business-Building Card, and Resources that include our business Grant Match Program.

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