Many small businesses fail within the first year, many more fail within the first three years, and only a few small businesses are still operating at the five-year mark. In most cases, the failure to survive is directly linked to poor financial management.
The numbers are sobering, but they shouldn’t prevent you from pursuing your dreams. If you know what mistakes to look out for and dedicate yourself to avoiding them, you can position your new company to thrive in the short and long term. So, how exactly do you achieve sound financial management in your business? Here are nine simple-but-important tips to keep in mind as you launch or grow your business:
1. Separate Your Business and Personal Finances
Far too many entrepreneurs combine their business and personal finances, which can lead to many different problems. More accurately, many business owners use their personal finances to fund the early stages of their companies and never end up distinguishing between business and personal money. A separate accounting system can protect you from liability, double taxation, and other issues.
2. Establish a Financial Management Strategy
Poor financial decisions and management can often be traced to the lack of a clear and robust financial management strategy. Take time to write a detailed plan of your monthly business goals and the financial steps necessary to accomplish them.
Your plan financial management strategy should include any relevant reports and information, including your income, expenses, cash flow, and monthly budget. Also, include a plan for generating revenue and use key performance indicators (KPIs) to track performance and identify areas of weakness.
3. Use the Tools Available
Entrepreneurs and business owners have countless tech tools at their disposal. Don’t make the mistake of maintaining outdated processes when you can streamline operations by incorporating free or affordable technology.
For example, an online invoicing system can help ensure clients pay you on time (if not early) while simplifying your bookkeeping and tax filing processes. Some tools will notify you as soon as a customer opens and pays their invoice, lets you schedule recurring invoices, and allows customers to pay invoices online.
4. Delegate and Hire
One of the most common mistakes business owners make is trying to do everything themselves. Chances are you care greatly about your company and have a passion for its products or services. So, it makes sense if you struggle to hand tasks off to others. But here’s the thing: you only have so much time in a day, and you can only work so hard. Figure out how to delegate tasks to your staff especially the tasks consuming the most of your time and distracting you from running the company.
The upfront investment of hiring top-tier freelancers, contractors, and agencies can quickly pay off when your business starts operating more efficiently. Ultimately, delegating tasks and hiring people will boost your bottom line while reducing your stress.
5. Educate Yourself
Another common mistake entrepreneurs make is that they commit to leases, loan terms, and interest rates before adequately understanding them. Be sure to do your homework if you plan to lease office space. Keep in mind that most leases favor landlords instead of tenants; you would do well to hire a lawyer to review any lease you are thinking about signing. Then, you can negotiate if necessary.
Also, carefully consider any loan you want to take out. Fees associated with receiving the loan and interest rates can eat away at your finances and cost your business much more than you anticipated. Shop around for the best rates and only commit to something you can pay back.
6. Don’t Hire Too Many People
Keeping too many employees on the payroll can also cause financial problems for your business. Many companies hire more people and keep them on staff when things start to slow down. This can lead to a significant waste of resources, especially if your employees don’t have any meaningful tasks they’re responsible for.
Carefully strategize your hiring process. You don’t want to be unequipped for opportunities but also don’t want to be spending too much money on excessive staffing.
7. Keep Up With Tax Filing
It’s no secret that taxes can be complicated. Many business owners fail to file their taxes because they lack the money or forget to file. Whatever the reason, neglecting to file your taxes on time can result in late fees, interest charges, criminal charges, and even the loss of your business.
Make every effort to stay on top of your taxes. Keep accurate records of your income and expenses, and monitor your tax liability throughout the year. Also, be sure to file and pay your taxes by the deadline.
8. Manage Your Credit
If you don’t know off the top of your head who your business owes money to, how much, and the percentage of debts you’ve already paid, it could indicate poor credit management. This not only can land you in a hole that is hard to come out of but also prevent you from securing loans and other financing opportunities down the road. Keep track of all your company’s credit activities to stay on a solid financial footing.
9. Maintain Working Capital
Every business needs working capital to pay its employees, purchase inventory, and invest in tools and equipment. If your company has a cash flow problem, you may have to resort to selling assets or taking out loans.
If you’re not careful, inadequate working capital can cause a range of financial issues and even insolvency. Make sure your team is keeping tabs on all your spending sources and that you have a solid credit management structure in place.
Effective financial management is one of the most crucial disciplines to learn as an entrepreneur or business owner. Implementing the tried-and-true tips above will help you avoid a range of money-management mistakes. But continue learning how to develop a firm financial footing that facilitates long-term growth for your company.