Do you dream of pursuing an idea you are passionate about to start your own business? Your venture has favorable prospects if your market research and product testing show demand for your offering. Another essential criterion for success is how well you manage finances in your concern. Taking early action to address the financial aspects of your business improves your chances of succeeding as an entrepreneur.
Why financial management matters
According to the Small Business Association, 20% of ventures fail during the first year of operation. A common reason for such failure is a lack of financial management. Not having access to capital to fund the venture or to cover shortfalls in working capital can hamper operations.
If you don’t monitor the inflow and outflow of cash in your business, you may not have the funds to pay creditors on time or meet urgent expenses. You can prevent such occurrences if you have a formal system to track sales, expenses, and the inflows and outflows of cash resulting from operations.
Financial issues can cause disruptions in the daily running of your venture. By having a system to take care of the financial aspects, you can put more time and effort into promoting and growing the business.
Here are four tips contributing to the efficient financial management of your small business.
1. Set up a system to track finances
Before setting up your system, decide what factors you want to track. To do this, write down your goals for the business, preferably for the next five years. Use this statement to create a set of targets for the first year. Determine how much revenue you need to break even on your operations for this first year.
Depending on the scale of your concern, use a spreadsheet or an accounting software package to track cash inflows, outflows, and key indicators such as sales, variable and fixed expenses, and profits. Compare results against those budgeted. Look out for significant variances and act as appropriate. A dynamic system that allows for refining based on the ups and downs of the business helps manage liquidity and long-term planning.
If you have no time to attend to finances, get the services of a bookkeeper or accountant to maintain records. This investment can be justified when you consider the ease of complying with tax and legal obligations.
Your financing needs will change as your business grows through the stages of startup, survival, and sustaining to become a mature concern. Whether you need working capital for your operations or funding to buy new equipment, your system will help determine whether you need short- or long-term financing.
2. Maintain a favorable credit score
Starting a business often involves approaching lenders to get funding. If you are a solopreneur, don’t assume that lenders assess your application based only on the merits of your venture. They also check your credit rating. A good or excellent credit score of over 670 improves your chances of getting funds. A poor credit rating may lead to a denial of your application.
If you have a low credit score, work on improving it. Pay your bills on time. Sell items you don’t need and use the proceeds to repay the debt. Check your credit report and request the credit rating agency to correct any errors that have adverse effects. Be vigilant about new purchases.
A good credit rating reflects how you manage credit — how you control expenses and meet payment commitments. Both these features matter when running your own enterprise. Having sound financial habits can translate to lenders offering favorable terms for your venture.
3. Educate yourself about other aspects of running the venture
While you may be skilled in fine-tuning your product to meet customer expectations, you may not be as proficient in other areas such as marketing, administration, and financial management. This situation can lead to missing out on opportunities or misunderstanding the importance of some factors affecting the business.
Even if you have a bookkeeper helping with finances, take time to understand key financial terms and factors that affect the profitability of your concern. Get up to speed by taking an online course or reading blogs and other resources relating to small business management. Also, keep track of economic and political developments as they can present new threats or opportunities.
As became evident during the recent pandemic, entrepreneurs who survive are those able to adapt when facing macro-level changes over which they have no control. Flexibility to change business models while remaining competitive requires a vision for the venture and a good grasp of the main factors affecting its survival. Investing time to learn about financial and other issues impacting your concern will give you the confidence to deal with stakeholders and face unexpected crises.
4. Maintain separate personal and business accounts
While the income you earn from working as an entrepreneur belongs to you, using your personal account for business purposes can lead to many problems later. Running a venture means paying taxes and complying with other regulations. Separating personal and business items from your current account and credit card will cost you time and a lot of hassle.
The better method is to maintain a separate business account and credit card for your venture. Many banks have options that let you transfer sales and expense items from your bank statements to your financial tracking system. This process saves time, eliminates unnecessary paperwork, reduces errors, and helps in efficient monitoring of operations.
Having a separate business credit card will help you manage expenses in line with your approved credit limit. Also, credit card issuers offer rewards such as cash-back, travel points, promotional bonuses, and extra points for certain expenses. Choose a card that provides maximum benefits for the type of venture you operate.
Sound financial planning can pay rich dividends
Entrepreneurship offers the freedom of choosing how to run a venture. It is a chance to apply your skills to meet a customer’s needs. However, many risks, such as changes in economic conditions and competitive behavior, also require effective responses.
You can manage these risks by setting up a dynamic financial system that allows for the monitoring of critical factors affecting your concern. By making informed decisions, you can focus on growing your business while adapting to competitive and other pressures.