Managing a small business is a never-ending battle. Many business owners assume their finances will be a struggle at the beginning but that they'll be able to relax more as they get their business established. As you've probably learned from experience, that isn't necessarily the case.
Many a business has gotten off to a great start only to fail decades later due to financial mismanagement. To keep your business and your dream alive, you need to constantly assess your financial situation and look for ways to improve it.
It can be a major business financial mistake to slash expenses across the board without consideration. You need to know the right expenses to cut and do it the right way, otherwise it may backfire. If you're struggling to find that balance, our financial experts are here to help.
Tips for Small Business Financial Management
Keeping your business' finances in tip-top shape isn't something you can conquer in one article or one book for that matter. However, here are some tips to help you along the way:
If You Need a Business Loan, Choose the Right Type
A business loan isn't just for new businesses. It can be a great way to get the capital you need to grow and expand your business. However, it's important you're equipped with the right information to apply for a loan that supports your business.
There are many types of small business loans to choose:
Working capital loans
Business line of credits
Commercial mortgage loans
Merchant cash advances
Each type of loan or financing has its pros and cons. It's advisable to understand the terms of the loan and choose one that is congruent with your business situation.
Along those same lines, make sure to carefully review all loan documents before you sign. Many business owners discovered themselves in hot water not knowing what they were signing up for.
Analyze Your Largest Expenses
Keep tabs on your largest expenses. If your budget is getting tight, cut the largest expenses to free up cash flow.
For example, one of the most commonly challenging expenses for a business is real estate. Moving to a smaller office or a less expensive area may be an alternative option.
To cut expenses for a larger difference, rent space in a co-working environment as opposed to having a dedicated office. Better yet, find a way for you and your employees to work remotely so you don't need a workspace at all.
Personnel is another large expense for many businesses. If you need to reduce your labor costs or keep them at bay, try hiring contractors instead of full-time employees. You'll only pay for the time you need, and there's no pressure to provide benefits.
Don't Take On New Capital Unless You Have a Plan for It
Another common pitfall for small businesses is accepting more capital than they really need from an investor or a lender.
Accepting too much capital can leave you on the hook for higher payments than you can afford. If it comes from an investor, you may be giving up equity unnecessarily or dealing with a new partner you don't want or need.
In a similar way, you can get into trouble by using capital for an expense you don't have the revenue to maintain. For instance, a restaurant has an opportunity to buy a second location at a low price. However, they don't even have enough business to fill their current location, so there isn't an adequate amount to sustain a second location either.
It's easy to find out you have an opportunity for a capital infusion and start seeing dollar signs. It's best to wait until you have a concrete plan to grow your business that requires more money.
Start Building Your Business Credit Early with an EIN
Not all businesses need an employer identification number (or EIN) from the IRS. However, you can't build your business' credit unless you have one. That's why it's best to get your EIN as early as possible. From that time on, all the payments you make will help you get a strong business credit score.
Remember to continue working toward a strong credit score indefinitely. Similar to a personal credit score, business' credit score is primarily based on:
Length of credit history
Types of credit you use
Building your business' credit should always be in the back of your mind. Even if you've been operating for a decade without an EIN, now is the time to apply for one.
Don't Make Assumptions About Your Price Points
Another common mistake for small businesses is underestimating costs when setting price points. This might seem like an issue for new businesses. It is advised to continually reassess your price points any time your expenses change or any time you add a new product or service.
If you acquire or build a product for 5 cents it may seem like a great profit to sell it for 50 cents. However, if your office expenses, personnel, taxes, and other expenses average out to 60 cents per product, you'll be out of businesses before you realize your miscalculation.
Invest in Accounting Software
Business owner's never intent to take on unnecessary expenses. Investing in accounting software is an expense that can pay for itself many times over. For small businesses, it's a much more manageable expense than hiring an accountant on an ongoing basis.
There are a variety of options to track finances from the start. You'll be surprised that the primary documents you use regularly can automatically be produced. These include balance sheets and profit and loss statements.
As an added bonus, most types of accounting software come with tutorials to help you learn the basics. Still, it's always good to know an accountant you can reach out to with specific questions and concerns.
Maintaining Financial Stability in Your Small Business
Small business financial management isn't an easy task to master, and it's an ongoing learning process. The tips above can help you toward building your successful business without taking on debt you can't handle.
Remember that as the economy and your industry shifts, your financial management should adjust as well. Keep the mindset of a continuous student, always looking for ways to improve your strategy.
If the next step in your business growth is to build more capital, reach out to our business lenders to find the right path.