“Dammit, Jim! I'm a doctor, not an accountant!” is a retooling of Dr. Leonard McCoy's famed Star Trek catchphrase, and it could be quipped by virtually any small business owner. Whether you're a designer with a boutique, a chef with a restaurant, a doctor with a clinic or any other type of budding entrepreneur, learning the basics of accounting and financial management are essential if you want your business to thrive.
Luckily, there are financial management tips that have worked through the years and across multiple industries.
9 Financial Management Tips that have Stood the Test of Time:
1. Realistic Budgeting
A realistic budget is almost as important as your business plan itself. A few hundred or thousand dollars here or there adds up, and if you haven't accounted for those expenditures, your working capital can quickly run dry. Go into spending with your eyes wide open – know what your fixed costs are (payroll, rent, utilities) and keep your variable costs (production supplies, commissions, travel expenditures) as reasonably low as possible.
2. Separate Personal and Business Finances
While it may be easy to muddle together personal and business finances, it should be avoided at all costs. Even if you're spending from the same account, record the transactions separately. This ensures that if you need business financial records to apply for a loan or entice an investor, the details you want are easily accessible. Additionally, it saves money by ensuring that you don't overlook claiming a business expense on your tax return because it was buried in your personal records.
Separating your personal and business finances is just the first step. All of your business' finances need to be well organized. You should know where your invoices, credit card statements and other financial documents are; even the records tracking your inventory supply and payroll projections should be organized and complete. If needed, you can leverage these records to take out loans against your inventory or to fund your payroll.
4. Wise Use of Credit
Whether you are borrowing against your inventory, taking out a line of credit or accepting capital from a silent partner, utilize credit wisely. Are the funds helping your business grow? Do the interest rate and terms promote repayment or will the loan lock your business into debt? Do a risk-reward analysis on every type of debt your business incurs and use debt strategically to grow your business.
5. Tracking Direction
Well-organized financial documents help you see where your business is going compared to where it's been. Track your growth, losses, successes and failures so that you always have a sense of how your business is doing. In particular, use financial records to assess what's working, what you need to change and where you need to focus as you project your future revenue, expenses and cash flow.
6. Tight Accounts Receivables Management
When you're focusing on your core business, and especially when it's growing, it can become tempting to overlook accounts receivables management. However, if you get overly comfortable with the idea that clients will pay sooner or later, your net 30 accounts receivables can easily grow to net 60 or 90. That stymies your cash flow and makes it hard to maintain your budget. Don't set the precedent of loosening your AR management. Instead, stay on top of accounts receivables and keep the turnaround time as consistent as possible – that makes financial planning across the board easier.
7. Tempered Staffing Growth
Hiring staff and bringing on new people who share your vision and help shoulder the work is exciting, but you have to account for salary costs as well as indirect costs (office supplies, extra utilities, payroll taxes, benefit expectations, etc.). Ultimately, if you cannot sustain these costs, you may have to let someone go, which is arguably one of the worst experiences of being a boss.
Temper your staff growth. Don't hire people until you know you have a sustainable, long-term position for them. If you need help, outsource some processes, reach out to the gig economy or hire a consultant.
8. Rainy Day Funds
Even with the most careful financial plan, unexpected expenses can pop up. To prevent a patch of turbulence from debilitating your business, have a rainy day fund in place. This could be cash savings, access to a line of credit or even well-organized documents that boost your ability to access emergency financing.
Related: Discover Bank High Yield Savings Accounts (Earns interest rates over 5x the national average! Personal accounts only, though)
9. Risk Management
Use your imagination as well as stories from others in your industry to assess your level of risk in various situations. What will you do if your computers crash? If your data is breached? If your supply chain fails? If your manager quits? If there's a robbery? Identifying, analyzing and planning for relevant risks in your industry is both quality financial and business management.
Regardless what your business does, it cannot succeed without the right financial management tactics. Track every dime that comes in the door, have a purpose for it and know where it's going. Proper financial management is a cornerstone to any business's success, but simply knowing the basics outlined above can go a long way to helping your endeavor thrive.
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