The Ultimate Guide To Financial Management For Small Businesses

An effective and efficient financial management system is the key to the success of every business. Without it, there’s only one unfortunate thing someone can expect to happen, and that is the downfall of the business, even if it’s potentially profitable and viable.

According to experts, hundreds of startups begin their trading journey every year. Unfortunately, most of them were unable to survive within five years of business. For most, it’s not the lack of clients, inefficient marketing strategy, or defective products that made them close their business. Unfortunately, it’s financial mismanagement that often results in bankruptcy.

That being the case, it’s important that financial decisions should be made from the start. While some start-ups are able to survive due to their ability to manage finances, many of them are still financially illiterate. Because of this, hiring a fractional CFO is the best option to go for to save their business from plunging into financial chaos.

These professionals will help you manage your finances properly and wisely, especially if you don’t know anything about business finances. Furthermore, here is a complete guide to help you manage your cash flow efficiently.

What Is Cash Flow?

Cash flow is how money moves in and out of your business constantly. It flows into your company from clients that purchase your products or services, and it moves out as payment for expenses, such as rent, salary, payment to suppliers, monthly fees for utilities, and other overhead expenses.

In addition, cash flow has two categories: positive and negative.

Positive cash flow occurs when the income you receive is higher than your expenses. This will help your business operate without delays. Also, your company will be able to recover from unexpected costs and problems.

On the other hand, negative cash flow is when your business gathers less income but has more expenses to pay. This may happen if you’re having problems paying your suppliers in due period, which would make you rely on loans. However, if you can’t pay these loans, it can only make your financial problems worsen.

Moreover, having a negative cash flow doesn’t mean an end for your business. As long as you’re able to bounce back from this, you have nothing to worry about, and you’ll be able to continue your operations without a hitch.

Why Is Cash Flow Important For Small Businesses?

Cash flow is crucial to all small businesses and their success. Unfortunately, most startups fail due to a lack of funds to continue operations. However, this problem doesn’t only occur to small businesses, even large corporations may sell their business to competitors if they can no longer pay off their debts and sustain their needs due to a lack of finances.

One of the most challenging parts of maintaining positive cash flow is during the inception of your business venture. This happens when you are still making a name for yourself and you don’t have any clients yet to purchase your products and services, which is necessary for a consistent income stream. So, it’s important that you’ve considered encountering these initial difficulties before starting up, you should have a contingency fund in place to sustain your operations while setting up for the first few months.

How To Manage Cash Flow Effectively?

Here are some things your small business can consider doing to steer away from financial dangers.

Create A Statement And Forecast

This is the most efficient way to keep a close eye on your finances. These documents will give you a bird’s-eye view of your actual and forecasted cash flow. With these, you can easily determine all the possible discrepancies that can be a bigger problem in the future, such as unnecessary company expenditures.

Furthermore, you may use accounting software to properly track your financial statements and reports. However, if you have no applications to help you, you may create these documents manually, even without accounting experience.

Create Effective Payment Terms

Creating an effective payment term is another way to manage your finances, and may depend on the services you are offering. For instance, businesses that directly transact with their customers, such as food service establishments, gather income immediately. However, professional services, such as electrical works and construction buildings, may receive their pay after finishing their jobs.

Also, if you are a supplier of another business, you may offer terms payable in a specific period of time. You may start offering terms lasting for only a week, especially if the business you are supplying is unfamiliar and new to you. But you may extend your terms if the business has built its credibility by fulfilling its financial obligation on time, every time.

Choose Who You Transact With Carefully

Since your business is only starting to make its name in the industry, it’s important to be selective on the people you give your services to, especially when offering terms on credit. Of course, it wouldn’t be easy to turn down prospects, but for the sake of having a positive cash flow and preventing bankruptcy, it would be the best option to choose.

There are instances when businesses suffer financial problems because some clients refuse to pay them, even after settling the terms. It would be best to file legal action against them, although it could be costly and take a lot of time to finish. As a result, it’ll be difficult for them to pay their staff and bills on time.

The best thing to do is check their credit background first and ask for references to prevent these problems from happening.

Set Your Conditions In A Written Form

Suppose you have found a client with an outstanding credit rating, perfect for supplying goods and services without causing any problem. You have to guarantee that the terms are clear and understandable and both parties agree to them. Also, you would want to make sure that your terms and conditions are sealed with a written signature before your transaction begins. This contract should state all the legal repercussions that they may undergo if they fail to pay you.

Build Strong Client Relationship

If you want to reduce the chances of delayed and refused payments, one of the best things you can do is build a strong relationship with your clients. You would need to make sure that receipts and invoices are sent to the right place and addressed to the right person.

Also, you don’t want to send the wrong invoice to your trusted and loyal client. That’s why it is important to check all the necessary details to avoid payment delays.

What Are The Basics You Need To Do?

When starting a business, here are things you need to take care of above anything else.

Create A Business Account

Having a separate bank account at the start of your journey is essential for every business. It also saves you from all the hassles of transferring everything from your personal account to your business account. Because if you don’t do this as soon as possible, you would have to inform your clients about your new account, which is an additional task for both parties.

On top of that, it’s easy to track the movement of your finances with a separate account, and you’ll be able to decide where to invest and put your money wisely. Additionally, when opening a new account, you need to consider some factors to avoid paying for services you don’t actually need, such as withdrawal fees, service fees, introductory promos, and more.

Use An Accounting Software

Using accounting software is essential for businesses that don’t have an additional budget to hire a professional accountant. It helps you manage your finances by allowing you to track the flow of your money, especially your expenses, such as bills, loans, and staff salary. However, if you want more detailed monitoring and personal handling of your financial accounts, hiring a professional accountant may help.

How To Manage Your Debts Effectively?

Debts are beneficial for every company, especially those in the phase of growing their businesses. Although, it can destroy your business if you don’t use them well. So, here are some suggestions to manage your debts properly:

Start Creating A Backup Fund

A backup fund is reserved money in case there are unforeseen costs, especially when the stream of income is halted. So, have a minimum saving each month to make sure that you have a financial lifeline that you can turn into in times of unfortunate events.

Increase Your Profits

Debts will make your cash flow negative, so it’s important to make sure your income is higher than your expenses. This will help pay off your debts without sacrificing anything in your company, such as reducing the number of your staff members. It’s best to gather your marketing team regularly to think of more ways to generate additional revenue.

Negotiate With Other Businesses

Debts may occur due to the high cost of materials. Accordingly, it’s important to negotiate with your suppliers to reduce the cost, especially when you’re purchasing bulk orders. You may ask them for discounts or use your exceptional credit record to make them extend your payment terms.

Final Words

Sound financial management is essential for the success of every business, especially for startups. To achieve this, make sure that your cash flow is always on the positive side so that you’ll have no problems paying your suppliers and your bills.

It would also be best to manage your cash flow by creating financial statements, effective terms, and worthy business relationships. These things will help you keep an eye on your finances and prevent unforeseen expenditures.

Furthermore, if you need help controlling and managing your finances, don’t hesitate to ask a professional chief financing officer or accountant for assistance. However, if you have no budget for professionals, you may use this guide to help you manage your finances.

Carolyn Ramage is a professional management supervisor. She has been in the industry for more than 13 years. Carolyn shares her expertise by writing articles online. During her free time, she enjoys yoga, cooking, and swimming.

Published by ExitAdviser


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