While there are a variety of factors entrepreneurs should consider to help maintain the health of their businesses, financial management is one of the essential points for the success of any entrepreneurship, be it in the short, medium, and long term.
Why is financial management so important and what can you do to get your finances in order?
Here’s an expert, yet easy-to-understand guide to clear up your doubts about it:
Why is financial management important to the success of a business?
Understanding how money moves in your business can benefit you in several ways, such as:
- Maintain greater control of expenses
- Use financial products wisely
- Generate, increase, and take care of the capital
- Expand the business through loans
In other words, knowing how to read financial reports is essential to obtain a vision of what is really happening with your business; at the end of the day, this translates into a greater ability to maintain its financial health. Financial management is then a basic tool that you must know to manage the finances of your business so that it generates profits and not losses.
7 tips for the correct financial management of your small business
1) Organize your business finances
Nowadays, it can be very difficult to access credit if banks see business disorder. If an entrepreneur doesn’t manage his finances properly, it’s impossible to ask a bank to trust him. In addition, not only banks, but also customers see as a sign of confidence and stability that a company has order and clarity in its financial structure.
Keeping a certain level of internal financial control is also important to prevent malicious employees from committing fraud against your business, as well as to avoid legal problems for not following the respective laws.
2) Be disciplined to pay, but also to collect
You would probably like the entities you owe money to give you more time to pay, but it would also be great if your customers were very punctual in their payments, right?
To solve this, it is best to learn to gradually develop discipline in both aspects: try not to fall behind in paying your debts, but don’t allow your clients to fall too behind in theirs.
Establish the conditions of sale for each operation and make it clear what the payment conditions are. It is also important to implement some tools that allow you the integral management of payments and collections to make your life easier.
3) Use financial technology to your advantage
Doing all of your business’ financial tasks manually can be tiring, increase the risk of mistakes, and waste unnecessary time. For that reason, adding the appropriate technological tools can bring more agility, security, and efficiency in the execution of tasks, playing also a fundamental role in the decision-making process.
Following the idea behind the last paragraph from the previous tip, when you’ve a small business that you want to grow, choosing tools that offer you benefits instead of bleeding your business finances, is a key factor you should consider.
In this sense, a business bank account that helps your business save money by providing important rewards and discounts, can make the difference between success and failure. A free online checking account with Nearside, can provide you a seamless banking experience to help you achieve your business goals easier.
4) Learn to read the books
The three basic documents that you must have in your business to understand the full picture of what is happening are:
The balance sheet
This document reports the assets, liabilities, and capital of a company. It serves to show the current situation of a business, acting as a kind of infographic that shows what the business owns, who it owes, and how much it owes, summarizing whether the business had profits or losses.
Something very important to remember is that when reading a balance sheet, the sum of the liabilities + the capital must be equivalent to the total assets.
The income statement
This document allows you to view sales, cost of sales, expenses, and taxes to determine how much money your business has made and lost in a given period. Through this tool you can see if your business is profitable or not.
Although this document and the balance sheet have some similarities, the income statement allows you to get a more detailed picture of how the money you invest is behaving and how much it costs you to generate a sale.
The cash flow statement
This document allows you to see all the money inflows and outflows, but more importantly, it allows you to understand where the money is coming from and where it is going to. Here, it isn’t longer just about cash, but also about all the economic resources available in a bank account or in cash to use in the operation of your business.
The cash flow statement helps you calculate initial capital, cash inflows, and cash outflows so that you understand how money behaves in your business.
5) Maintain a contingency fund
Did you know that only 30% of the new small businesses that are created, manage to survive beyond five years?
One of the main reasons for a business bankruptcy has to do with internal money mismanagement. This is contributed by the fact that entrepreneurs don’t save money when they spend on operations that can be managed with less expenditure of time and resources.
Since it is impossible to predict the future, it makes sense to keep a contingency fund always at your disposal for any unforeseen events. Try to save between three and six months of your expenses, so you can face even a couple of months of low income with greater ease.
6) Invest in growing your business
In addition to being important to face any future contingencies, saving can also serve as a basis for investing in new growth opportunities for the business. This also implies having a certain vision of the future.
Keeping a vision for the future with growth expectations will help you innovate, but also attract and retain the best human talent you can get. In addition, customers will also feel that the company wants to offer a better service, so the business will look much more attractive to them.
7) Use loans in a timely manner
Although loans can bring some additional stress, the flow of capital they provide can help you deal with a variety of situations that may arise, whether it be acquiring new equipment, scaling the business, or even solving minor payment issues. When it comes to getting funding, there are basically two categories:
7.1) Debt funding
This is a loan that your business must pay with additional interests. In this way, your business can access capital as quick as necessary, including:
- Bank loans
- Government loans
- Cash advances
- Credit lines and cards
The problem is that you must pay even if your business fails.
7.2) Equity funding
This type of funding involves less financial risk and you don’t need to repay if your business fails; instead, you’ll have to give some level of control to the parties involved. In this category, we can find venture capitalists, angel investors, and equity crowdfunding firms.
Having basic knowledge and tools for better financial management is essential for the success of any business, regardless of its size. The points covered in this post can serve as a basic knowledge guide if you want to approach experts or providers, such as Nearside Business Checking, who can help you achieve the success you want for your business.
Remember that it isn’t about getting there first, but about knowing how to get there. So don’t be so determined to grow very fast; instead, focus on doing it wisely.