6 Tips to Effectively Manage Your Small Business’s Finances

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For first-time small business owners, managing their companies’ finances can prove to be a challenge. Many small businesses fail because of bad financial habits, poor planning, mismanagement of cash flow, and lack of proper guidance and resources.

However, if you want your small company to thrive, it is important that you have a strong financial literacy and are aware of the common pitfalls that could harm your business. Here are some valuable tips on how you can efficiently stay on top of your small business finances.


1. Develop a Financial Plan Early On

A solid financial plan is essential for your company to succeed. It will serve as your roadmap to help remind you of your short and long-term financial goals. In order to ensure that your small business stays relevant, you need to think ahead and create a plan for the future.

Keep in mind that no plan is universal. So, you need to develop a plan tailored to your small business. Perform a simple forecasting of your small business for the next five years or more. By doing this, you will be able to spot potential problems before they manifest so you can make more informed business decisions. Some of the standard components of a financial plan include:

  • Cash flow statement
  • Balance sheet
  • Profit and loss statement
  • Break-even analysis and business ratios
  • Personnel plan
  • Sales forecast

In addition, always remember that certain circumstances could trigger your financial plan to change. To efficiently manage any financial crisis, you need to be flexible and proactive whenever you need to make any changes to your financial plan.

2. Separate Your Personal and Business Finances

One crucial mistake you can make as a small business owner is combining your personal and business finances. To avoid any legal complications, make sure that you open a business account solely dedicated to your company’s finances. Many small businesses are structured as limited liability companies (LLCs). As an LLC, you are legally compelled to open a separate business bank account.

Aside from opening a business account, it would also help if you open a business credit card or a line of credit. You don’t need to use it right away, but having a credit card can help you establish your business credit. Keeping your finances separate can help you keep track of your cash flow so you can restructure some aspects of your company and ensure that your inflows are greater than your outflows. It would also help you determine your tax write-offs. 

3. Work on Your Debts to Better Manage Your Finances

Debt is a valuable tool for almost all small businesses, and understandably, there are only a few debt-free businesses. If you want to grow your small business and have limited funds at your disposal, taking out loans may be your only option.

However, it is highly important that you manage your debts effectively to prevent them from going out of control. Evaluate your finances and debts regularly and look for ways to reduce them. Work with your accountant to check if you can shift your debts to a different lender with better loan terms.

Analyze your spending and cut off unnecessary expenses that will not have a massive impact on your business operations. For instance, if you have a cleaning company that manages your office every week, consider availing their services on a bi-monthly basis instead. If you tend to regularly take your clients out on dinner meetings, make use of your meeting rooms and order coffee and pastries instead. 

4. Maintain Good Business Credit

As your small business grows, you will likely need to take out loans to improve your company. Whether you plan to relocate to a bigger office or purchase new equipment, it is imperative that you have a good business score to increase your chances of getting approved and receiving a favorable loan term. To maintain good credit, make sure that you: 

  • Keep your debt level low
  • Limit your credit card usage
  • Pay your bills on time
  • Avoid closing accounts
  • Check your business credit report regularly
  • Dispute any discrepancies
  • Use your credit wisely
  • Avoid any kind of risk

5. Keep Track of Your Cash Flow

Cash flow is another essential aspect of your finances that you would need to monitor to ensure that your business thrives. It is natural that you might have a negative cash flow during the early days of your business. It is important to note that a negative cash flow will not damage your small business. However, as long as you have a plan on how to mitigate it, a negative cash flow should not cause a severe problem for your company.

Additionally, depending on your business type, your cash flow could fluctuate at different times of the year. Make sure to track your cash flow on a weekly and monthly basis and be prepared to make adjustments to regulate it. Cultivate a good relationship with your suppliers and customers to avoid misunderstandings that could affect your cash flow. Talk to your suppliers to check if you can change your payment dates and set them during the period of the month where you have a positive cash flow. 


6. Monitor Your Expenditures Regularly

Make sure to keep a close eye on your business expenditures. Also, review them regularly to get a clear picture of which of your investments are worth continuing and those that you need to let go of. Furthermore, ensure that you monitor the return on investment on all of your expenditures to avoid wasting your finances on initiatives that do not suit your small business.

If you don’t know where your hard-earned money is going, you are basically setting up your company to fail. Instead of using a spreadsheet, consider using an accounting program that can formulate valuable reports. You can also get the assistance of a professional financial expert such as CFO Strategies LLC to help you keep track of your financial interests. 

Final Thoughts About Managing Your Company’s Finances

Managing your small business doesn’t need to be complicated or overwhelming. However, with thoughtful planning and good financial habits, you can create a stable financial future for your small company.