Your business financial management skills will play an important role in your success. According to reports, 7 out of 10 businesses fail within 10 years. Apparently, the inability to take full control of the expenses is one of the cited reasons for businesses to fail. If you think about it, your ability to control your business expenses is rooted in your personal money habits. If you have no idea how to manage your personal finances, it is highly unlikely that you can manage the finances for your business.
This is the reason why, as a business owner, you need to make sure that you have the right set of business financial management skills. At the very least, it will help you make the right decisions that will bring growth to your company.
4 basic business financial management tips
What you have to understand is that your business financial management strategy can be unique. It should be based on what type of business you have, goals, market, capital, etc. Of all the financial management tips that you need to learn, here are the four important concepts that you need to prioritize (or at least start with).
Separate your business and personal finances
This seems like a given once you start your business but you might be surprised to know that there are those who fail to separate their business and personal finances. A survey revealed that 23% of business owners and managers consider this as one of the biggest financial challenges that they face. It is not clear from the survey if they consciously decide not to separate it, or if they do not know how to do it. Regardless of the reason, it is important for you to always keep these two separate.
The truth is, it can be convenient to combine the two. However, if you really want to grow your business, you need to have them in different accounts. If you fail to keep them separate it would be hard to monitor your finances. It can be confusing and there is a high chance that you will overspend and use up your business funds for your household needs which can be dangerous. Make sure you have different accounts so you will not mix them up because monitoring your finances is another basic business financial management skill that you need to learn.
Find the best tracking method
The whole purpose of business financial management is to monitor your finances so you will know how to utilize it properly. Some people might find this time consuming or tedious. Fortunately for you, technology has provided us with a lot of methods and tools that will make it easier to keep track of all the financial transactions of your business.
Here are two methods to accomplish this:
- Accrual basis method. This method records revenues and expenses when they are earned – regardless if these are actually received or paid.
- Cash basis method. This method considers it a revenue when it is received and an expense once it is paid off.
To illustrate, let us assume a product is sold during the month of March but will be paid in April. This will be recorded as profit for the month of March by the accrual basis method. Although, if you follow the cash basis method, this will be recorded as a profit for the month of April. The same is true for expenses.
You need to choose the right method based on the needs of your business – specifically in terms of cash flow. Usually, accrual basis requires close monitoring so as not to compromise the cash flow based on the money that has yet to be received or should be reserved for payment in the future.
Have someone focus on monitoring it
Aside from finding the right method, it is also important to find someone who can focus on monitoring your business finances. While you need to stay on top of things, that is not the owner’s job. The owner has to focus on growing the business. Someone else should monitor the financial transactions of the company.
If you have a small business and you cannot afford to hire an accountant in-house you can outsource this. According to a survey, more than half of their respondents work with third-party accountants and they rank it as a “high affinity.” Of course, even if you hire an accountant to do this job, you still need to maintain your own financial records because this will be helpful when you make decisions about your business.
Regularly check up on your financial position
The final business financial management skill that you need to implement is to schedule a regular check of your finances. As mentioned, even if you have someone focusing on this part of your business, you need to keep an eye on it as well. Make sure you get regular reports of your financial standing. This will help you identify areas that need improvement so you can help make your business more profitable.
Apart from getting reports, you need to have a sit-down meeting to discuss the finances of the business. This will allow you to ask questions and get the expert opinion of the accountant that is handling the finances of the company. Sometimes there are decisions that require their expert opinion to ensure that it will lead you to the results that you want to achieve.
Tips and tricks to stay on top of your business finances
Aside from the 4 business financial management tips mentioned, there are other tricks that will help you handle your finances better.
- Get to know basic accounting concepts. This will ensure that you can easily understand the terms and technicalities of accounting. Among the things that you need to learn include reading financial statements, budgeting, cash flow, etc.
- Make it a habit to pay your bills on time. This will make it easier for you to monitor your cash flow. Plot the regular expenses and overhead costs so you know what you expect. Some of these will incur late penalties if not paid on time, and that will waste your money.
- Be careful when you use credit. In any business, there is always a chance of using credit. This is not bad but you need to make sure that you know how to use it wisely. This includes credit cards, business loans, etc. When you borrow money for the business always have a repayment plan in place. Not only that, you have to set strict rules on how to use credit – especially when it involves credit cards.
- Adopt a frugal state of mind. Always find ways to save on purchases. It is not just about finding the cheapest option, you should focus on what will give you the best value for your money. This will also be useful when you are negotiating contracts. While you are at it, make sure your choices are also environment-friendly. That will usually give you rewards and rebates from the government, and you can take advantage of that.
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