5 Practical Steps To Manage Your Business Finances More Effectively
All companies, whether big or small, are concerned about managing finances. Cash flow hitches and mismanaged finances can easily lead to business failure particularly in the early years.
When small businesses selling website templates fail to create good financial strategies and set their heights too high or too low, it can also have a negative impact on growth and sustainability.
There are ways to mitigate risk for small business finances by being aware of common pitfalls and carefully designing a financial plan that takes into consideration the size of the business, the nature of expenses, and growth prospects.
Here are five practical steps that you can take to rein in on spending and formulate a financial plan that helps streamline day-to-day operations while facilitating savings and expansion.
1. Learn to read financial statements
If you don’t already know how, learn to read financial statements.
It tells you everything you need to know about where money is coming from, where it changed hands, and where it goes. A financial statement typically contains four main elements:
- Cash flow statement — describes the company’s operating activities
- Balance sheet — shows the company’s assets
- Income statement — shows amount of revenue earned within a specific timeframe
- Shareholder’s equity — outlines the amount by which a company is financed through common and preferred shares.
By learning how to read a financial statement, you’ll have taken the first steps to be on top of your business finances.
2. Separate personal and business finances
Your personal finances, if not separated, can complicate your business finances. For this reason, it is recommended that small business owners take out a business credit card and load all related expenses on it.
If possible, open a savings account for the business wherein you can deposit a fraction of each payment you receive and slowly build a significant cash reserve. This will allow you to keep track of your outlays and curb spending.
3. Chart your cash flow
Comprehensive accounting software will include charts of accounts payable (outflows) and sales of goods and services (inflows).
It also allows you to alter the time periods so that you have a clearer picture of where the money’s going.
When you refer to these types of charts over a period of time, you will begin to understand cash flow rates and how finances move into and out of your business.
Ideally, the inflows should be greater than outflows in order to facilitate healthy turnover.
Bear in mind the existing difference between inflow and outflow will vary over time because few small businesses manage to make consistent profits on a day-to-day basis. The charts will help create a pattern to show how these values change over time.
4. Make relevant cash flow adjustments
Where possible, keep enough cash on hand to last the business at least three months. This way if the business suffers a difficult month or two it shouldn’t kill it.
Small businesses often experience cash flow problems during specific times of the year. If this happens, you might still be able to improve the situation. Here are a few adjustments to consider:
- Set up different payment dates to the suppliers so as to align inflows with outflows.
- If possible, try reducing the payment terms for your invoices by a day or two to encourage clients to pay faster.
- Create a reliable line of business credit so that you have quick access to short-term cash whenever necessary.
- Refrain from overstocking your inventory — this takes up extra space and costs major revenue.
5. Minimize spending
Entrepreneurs have to remain tightfisted in order to maintain customer satisfaction. Businesses typically endure two types of costs: fixed and variable.
While you may not have much liberty with fixed costs, there is a significant scope for savings when you tune up variable costs.
For instance, if you spend a significant amount of money on branded software, you may consider using free cloud-based open-source software, which can be equally good.
The same applies for calls and video conferences: make use of cheap online video calls as a substitute for expensive travel whenever possible.
Bonus Step: Manage company debt
Very few businesses are entirely debt-free. Small companies often have to repay loans for capital equipment, startup funding, and/or commercial mortgage payments.
Keep a close eye on your borrowing costs (especially with variable rate loans) and assess your debts on a regular basis.
Examine all your repayment costs and establish whether your circumstances have improved or worsened, and decide whether to increase or minimize your debt funding.
With just a bit of effort on your part managing your business finances, you won’t have trouble making a success out of selling website templates.
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Originally published at www.bookmark.com on October 11, 2016.