Perhaps the greatest small business failure can be attributed to failing to seize control of financial matters from the beginning. Everything flows from that. Lose track of exactly how much money you’re making and spending and it’s a slippery slope downhill to Bankruptcy-ville. The good news is this isn’t brain surgery. Anyone with average intelligence and a dedication to the mission can figure this stuff out in order to ensure your business survives and thrives for years to come. Here are the critical actions to take.
Budget, Budget, Budget!
One of the most important aspects of small business finances is to create a realistic operating budget based on income reality and stick to it. Thanks to a little invention called the computer, you can find any of dozens of software tools that make creating a budget a snap, and the more you do it, the better you’ll get. Without a budget, you’re probably not going to make it.
If you don’t swear a sacred oath to spend less money than you make, your business will shortly have a big problem. The bottom line here is positive cash flow. Without it, operating will soon become impossible without infusions of borrowed cash, which creates another whole problem which we’ll talk about next. For now, train yourself to not spend more than you make. Period.
Debt is Not the Solution
Borrowing money for your business can be enticing, especially with so many non-traditional lending companies ready to throw money at your feet. Get it into your head early that this is not free money. It must be repaid with interest and that can put a huge strain on a business’s already tight cash flow. Exhaust every other opportunity to tighten spending before you consider a loan.
Know Your Cash Flow
You need to know the actual cash flow generated by your business. This is not the time for best-guess estimate. Newbies to the business world are often surprised to find out that standard practice in many industries is for B2B vendors and customers to have 30 to 60 days to pay invoices, and you can’t spend the money until you have it. That can create a real problem unless you anticipate it.
Plan for Tax Season
Some experts say a small business owner should set aside 35 percent of all income for the tax man. If this figure makes your stomach turn a series of uncomfortable flips, keep in mind that there will normally be deductions that offset a portion of this, but it’s a good idea to plan for the worst-case scenario. Trying to take taxes owed out of a tight cash flow can be next-to-impossible and has torpedoed many a business.
Fund for Emergencies
In case you haven’t noticed, sometimes life doesn’t work out exactly as planned. The same is obviously true for a small business. We’re talking about the same kind of surprise expenses that pop up in your personal life – equipment failure is one example. In order to continue to meet obligations like rent and payroll, make it a point to maintain an emergency fund to keep operations going when cash flow gets tight.
The Importance of Record-Keeping
You probably don’t need a full-time accountant, but retaining the services of a part-time bookkeeper might be a necessary expense. You need to spend your time and energy on growing the business, not laboriously updating accounts. Thanks to the internet, you can hire a remote bookkeeper at a modest price.
Fund Cash Flow Fluctuations
What we’re talking about here is different than an emergency fund. Call it a Flexibility Fund if you like. The idea is to acknowledge the reality that business income fluctuates from month to month, sometimes greatly. Set aside money from positive cash flow months so you can still pay the bills in the slow ones.
Grow the Business
Often it seems your entire existence can be consumed just in keeping up with the day-to-day process of running a business. In order to grow that business, you’ll need funds for creating new products or services, additional employee training, and maybe new asset purchases. It’s a good idea to regularly set money aside for that or it may never happen.
You do plan to retire some day, right? It’s never too early to start planning (and saving) for that day. A Simple IRA Plan is the perfect solution for many small business owners, though consult your tax or legal professional before setting one up. This allows for aggressive saving in your younger years for a nice, comfy retirement on down the line
The Bottom Line
No one ever said that running a small business’s finances is easy, but it’s not as hard as you might think. The trick is to get ahead of the game and never stop running. The 10 financial principles above offer a heads-up to all the major categories you should pay attention to. If you ever feel like you’re sinking under the details, don’t be afraid to bring in professional help. It’ll be money well spent.
Davenport Laroche, Alternative Investment Opportunities out of Hong Kong