Maintaining the financial health of your business requires effective education and organization. Proper management of finances is essential for stabilizing your company and reducing the risk of failure. To achieve this, you should prioritize paying yourself, maintaining good credit, keeping track of financial records, and planning ahead.
For small businesses, debt funding may come with repayments and interest, while equity funding may lead to reduced control over company affairs. This article provides guidance for business owners seeking advice on managing their company finances.
In many cases, small business owners excel at producing products or providing services but lack expertise in financial management. However, this aspect of running a business is crucial to its survival and success. Although it may be challenging, developing responsible financial habits can set your business on the path to prosperity.
Types of Funding for Business Finances
It is essential to keep in mind that business finances, encompass not only your earnings but also your expenditures and their sources. Fintechs especially, need to focus on understanding the following two main funding categories.
Debt Funding Finances
Debt funding involves a loan that your business must repay with interest. This type of financing allows for fast access to capital that may not be available for several weeks or even months. Debt financing options typically include bank loans, government loans, merchant cash advances, business credit lines, and business credit cards. However, it’s crucial to understand that if your business fails, you are still responsible for repaying the debt financing you received.
Equity Funding Finances
Equity funding differs from debt funding in that it does not necessarily require repayment if your business fails. However, you may be required to give your funders a say in decision-making. Examples of equity funding include venture capitalists, angel investors, and equity crowdfunding. For further information, you can refer to our guide on the distinction between debt and equity financing.
Pro Tip : Debt financing typically involves traditional loans that require regular interest payments, while equity financing may involve less financial risk but requires you to relinquish more control to external investors or stakeholders.
To ensure a stable financial future and avoid failure, it is crucial for any business owner to take the first and foremost step of educating themselves. This includes acquiring fundamental skills essential for running a small business, such as conducting simple accounting tasks, applying for a loan, and drafting financial statements.
Moreover, organization plays a crucial role in sound money management. While seeking advice from a professional is advisable, it is essential to have a firm understanding of the daily management of your business’s finances and a plan for the future.
1. Invest in Growth
It is crucial to set aside funds and explore growth opportunities that can help your business prosper and move towards a financially secure future. Edgar Collado, the Chief Operating Officer at Tobias Financial Advisors, advises business owners to keep an eye on the future.
“Small businesses that wish to continue to expand, innovate, and attract the best employees should show their willingness to invest in the future,” he stated. “Customers will appreciate the increased level of service, and employees will appreciate that you are investing in the company and in their careers.
Ultimately, you will create more value for your business by investing profits in the company instead of spending them on personal matters.”
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2. Don’t be Afraid of Loans
Business owners may feel anxious about the financial consequences of failure when taking out loans. However, without the additional capital acquired from loans, they may encounter significant difficulties when purchasing equipment or expanding their team.
Loan proceeds can also be utilized to enhance cash flow, enabling timely payments to suppliers and employees. Additionally, many small business owners can comfortably comply with the terms and rates of the best business loans.
3. Billing Strategy is Key
Managing cash flow is crucial for a small business, and late-paying customers can lead to financial difficulties. To avoid this, it may be necessary to use creative billing strategies. this can help reduce the amount of cash tied up in unpaid invoices and prevent cash flow problems, which are a leading cause of business failure.
4. Keep Good Business Credit
As your business expands, you might need to acquire more insurance policies, purchase additional commercial properties or obtain more loans to fuel growth. However, having poor business credit can make it challenging to get approval for these ventures and acquisitions.
To maintain a good credit score, it is crucial to repay all debt financing as soon as possible. For instance, avoid running a balance on your business credit cards for an extended period. Similarly, do not acquire loans with interest rates that are beyond your means. Only seek funding that you can promptly and easily repay.
5. Account management is crucial
It may sound obvious, but consistently reviewing and monitoring your books is crucial. Even if you have a bookkeeper, it’s important to set aside time each day or month to stay familiar with your business’s finances and detect any potential financial fraud.
“Don’t overlook bank reconciliations and spending time each month reviewing outstanding invoices,” advised Terence Channon, principal at NewLead LLC. “Neglecting these tasks, especially if a bookkeeper is involved, can result in wasteful spending or even embezzlement.”
6. Keep track of expenditures and ROI
Rewritten: It is essential to assess your expenditures and return on investment (ROI) to determine which investments are worthwhile and which ones are not. According to Deborah Sweeney, CEO of MyCorporation, small business owners should be cautious about their spending habits and prioritize their spending based on the ROI.
“Pay attention to the ROI for each expenditure,” Sweeney advises. “Otherwise, you risk losing money on irrelevant or poor spending choices. Know where your hard-earned money is going and how that investment is performing. If it isn’t delivering returns, reduce your spending and focus more on initiatives that work best for you and your business.”
7. Focus on good financial habits
Ensuring the financial stability of your business can be achieved by implementing internal financial protocols, even if it is a basic routine of reviewing and updating financial information. By being proactive in managing your finances, you can effectively protect your business from fraudulent activities and risks.
Implementing internal control measures is critical for small business owners, especially those with employees. He stressed that weak internal controls can lead to employee fraud or theft, as well as legal issues if the business fails to comply with certain laws. Even with limited resources, small business owners should prioritize establishing internal controls to safeguard their financial health.
Conclusion
Ensuring success in a business can be challenging, but with the right guidance and tools, it can be accomplished. Based on my experience working with businesses like yours, I have compiled a list of 7 effective tips to help you manage your small business. Have you tried any of these strategies? Share your success stories in the comments below!
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