Just because you run a business from home, it doesn’t mean you don’t need to be serious about it, especially when it comes to managing the business. The success of your small or home business relies on good management. You need to document everything, handle business accounting, and manage your business finances properly.
The latter is particularly important because it also affects your bottom line. When you manage your business finances properly, you also have more options when there are challenges to overcome. Business financial management doesn’t have to be complicated either. There are some basics to cover and we are going to review them in this article.
Think About Cash Flow
The health of your business depends highly on how healthy your cash flow is. Maintaining a healthy cash flow is a challenge when you run a non-cash business, but it is a challenge that can be tackled with careful planning and good financial management.
The key to maintaining a healthy cash flow is balancing between income and expenses, particularly the timing of those transactions. You want to maintain enough cash reserve so that you can always pay your business bills on time.
You can take cash flow to the next level by enhancing the size of your cash reserve. When there is a spike in demand for your products, you don’t have to immediately turn to financing options to increase production when you have enough cash and a healthy cash flow.
Weight Your Options
Speaking about financing options, you need to make weighing your options a habit as a business owner. I know the tempting thing to do is to use business financing whenever you need to fill gaps in your budget. This isn’t how you want to run your business, especially if you want to maximise your profits.
What you need to do is look at every situation objectively. When you need to borrow money to cover the production costs of a big order, for instance, you want to consider the costs of using the loan compared to the profit you earn from that particular order.
Only use financing when you know you can maintain a healthy cash flow and when the financing option is beneficial for the business. There is no point in trying to meet a big order using business financing when all of your profit goes towards paying the interest and fees of the loan.
Separate Business and Personal Finances
Despite the many resources designed to help business owners run their companies better, there are still those who mix personal and business finances. It may seem like the convenient way to go, but it makes things complicated in the long run.
For starters, calculating your bottom line and operational revenue gets harder because you cannot always consolidate your books. When you mix business and personal expenses, it is also difficult to know your costs and manage them properly.
Things get even more complex when you add accounting and taxes to the mix. Even when the books are joined together, you still need to report your business and personal tax returns separately. Without separation from the start, you will end up with a big mess that isn’t always easy to sort out.
David York, reputable tax advisor and consultant cautions: “Keeping the business and personal taxes can be a tremendous challenge, especially since there are areas where the two are closely tied together, such as when you are using your home or personal vehicle for business purposes.” In these cases, York recommends consulting an expert.
Proper Financial Management from the Start
Don’t wait until the business is bigger before you start to manage your business finances properly. Accounting isn’t something that you want to do when the business is growing rapidly. It is something you need to take care of when you start the business.
Good financial management is now less complex thanks to the software and tools available on the market. Even when you don’t know the advanced accounting tricks to use, you can still do basic business accounting with the help of a good accounting suite.
Taking relevant finance courses is also an idea worth considering, especially if you want to improve as a business owner. As the business grows, your financial management skills will be even more valuable than ever. You can click here to investigate course options that are available and learn more about how different courses can aid your business.
One of the best things about operating as a business is that you have a lot of room to negotiate. Vendors are more than happy to offer discounts, special terms, and even quotes designed specifically to win your business. With the market becoming more competitive, these special offers are easier to find.
Always take the time to negotiate with your vendors. There is no discount too small to pursue. On top of the direct discounts and special offers, you will also get additional discounts based on your payment term. Paying your expenses early could lead to up to 10% in further reductions.
Remember that lowering your costs is how you remain competitive in a tight market like today. As mentioned before, there is no discount too small to pursue when you know that it can affect your profits as well as your ability to compete in the market.
Watch Your Financial Credibility
It is really important to maintain a high level of financial credibility as a business. You want to pay your bills on time – or even early, for the extra discount you get from your vendors – and keep up with loan repayments accurately. This is why maintaining a healthy cash flow is a must.
Your business’s financial credibility can have a big effect on its future. When your loans are repaid on time, lenders are more than happy to provide you with more (and better) financing options in the future. The same can be said for your insurance companies and vendors.
You can also maintain a sustainable growth by keeping up with expenses properly. As your business grows, its financial credibility grows alongside it. With a reputation like this, finding investors, partnering with other industry players, and reaching more customers will be easier.
Budget and Plan
Not doing budgeting is another common mistake many business owners still make when managing their business finances. Budgeting may be a tedious process, but it is a necessary evil for the success of the business.
Budgeting lets you allocate the funds you have and plan for expenses better. You know how much you can afford to spend on marketing, office supplies, and other posts before the month begins. As a result, you can keep track of (and control) your expenses more meticulously.
It is okay to go over budget every now and then, but you can run a frugal operation when you have a clear budget to work with. You can make better decisions financially; you will always know the state of your business at all times when you have a budget guiding you.
Manage Your Overhead
Last but certainly not least, always take extra steps to limit your overhead costs. With a clear budget in hand and a healthy cash flow to work with, controlling overhead costs is easy. You already know how much you can afford to spend on overhead costs; you just have to stay under that ceiling.
There are a lot of ways to lower overhead costs and keep your business efficient, but we are going to save them for another article. In the meantime, use the financial management tips we discussed in this article to nail the basics of your business finances.