Statistics show that only about half of businesses survive their first four years. One of the biggest reasons both big and small businesses fail is due to financial troubles whether that be from not managing money correctly; not being able to afford supplies, equipment, and/or rent to stay in business; and/or merely not being profitable.
The slim survival rate of businesses often scares prospective and new business owners. Due to such worries, some may give up their dream of owning a business for fear that it will never be a profitable venture.
While the statistics surrounding business survival are hair-raising, the good news is that many businesses still do financially well. Regardless of the success of a business, finances are still a critical aspect of a business and must be managed properly to ensure it stays afloat for years to come.
With the following expert tips, you’ll be able to not only manage your business’s finances well but do it more accurately than ever before. In turn of more accurate finances, you’ll be able to have a better idea of the future success of your business.
1. Open a separate bank account.
The bigger your business, the larger your business expenses, and the more profit you rake in from the business, the more important it is to have a separate business bank account. By having a separate bank account for your business, tracking business expenses and profit will be easier than ever before.
Likewise, keeping your business’s finances separate from your personal finances gives you greater control over your spending habits. This way, you can see where your finances are going wrong and can fix them before they get worse and potentially lead to the destruction of your business.
2. Keep track of your business expenses as you go.
One of the biggest mistakes a business owner could do, especially when running a larger company, is to wait until the end of the year or right before paying taxes to log and track business expenses. Waiting to track your expenses encourages you to spend more money throughout the year. After all, if you don’t know how much you’ve spent, it’s easy to spend more.
When you track your business expenses as you make them, this not only gives you a better perspective over your spending habits but logging your expenses as you go gives you less work to do later on.
3. Put your personal financial needs first.
Clearly, your business is important, as is the profit you bring in from your business. However, your personal finances always come first. Your home’s rent or property taxes, groceries, water and gas bills, and the like should be a priority over the expenses of your business. After your personal finances are cared for, your business financial needs come second.
Imagine if you lost everything in your personal life: your home, your car, the money in your personal bank account, everything. While you’d still have your business, if your business goes under, you’ll be losing that too. While your business may be a primary or sole source of income, at least you can always find another source of income before your personal finances crumble.
4. Don’t push expansion when your business isn’t ready.
A common reason why many businesses fail is due to the push for expansion. Some business owners get eager to expand way too soon in business. Why? Because it means they can have an easier time competing against their rivals and make more money. However, this isn’t always the case. Expansion typically involves a lot of money, money a business owner may not have.
Even if you think your business desperately needs expansion, make sure the finances are there to do so. A lesson every business owner should know is to never expand before a business is financially or physically ready, and never overexpand when a business is ready. Expanding too rapidly or at a time when consumers aren’t ready for it is essentially a death wish for a business.
5. Utilize bookkeeping and accounting software.
Organizing your finances properly is important, even for small business owners. If numbers and organization aren’t your strong suits, using bookkeeping and account software can help you keep your finances all in one place with an easy-to-navigate interface, giving you more time to put back into your business and less time worrying about organizing finances.
From aiding you with payroll to helping you with regular operations like tax management and budgeting, there’s a lot these programs can do for you and your business. Numerous softwares for different types of business, including special restaurant accounting software, exist on the market today.
6. Stay on top of invoicing.
Invoicing is one of the many important duties many business owners have. However, it’s easy to forget to invoice or to slack on sending out that request for payment. But to keep the money flowing and to ensure your finances are well-organized, it’s critical that you send out invoices immediately after goods or services are provided.
Apart from the latter, it’s a good idea to set up payment terms for seven to 10 days and always follow up on unpaid invoices. It’s not uncommon that a client forgets to pay, and it’s also not uncommon that you forget that they haven’t yet paid. By learning to be more strategic with invoicing, you can develop better financial habits.
7. Build an emergency fund.
Just like many of us have personal emergency funds to back us up financially during those times where our car suddenly breaks down, we end up in the hospital or have an unexpected water leak in the home, an emergency fund can come in handy for businesses as well. A separate emergency fund for your business is essential in many cases.
But why would your business need an emergency fund? There are many reasons: in case a customer sues your company, your profit declines, business equipment needs to be repaired or replaced, and the like. It’s always good to have a financial backup just to be on the safe side. Those who are financially prepared for emergencies are more likely to survive in business.
8. Emphasize debt reduction.
For many business owners, accumulating debt is inevitable. Many new and older business owners must take out a loan to pay for the startup and expansion of their company. This is especially true if a business owner doesn’t have a financial or business partner to help them pay for the things their business needs.
Regardless of how much money you borrow as a business owner, making debt reduction a priority when it comes to managing your business’s finances is critical. Remembering to make repayments, being mindful of your spending habits so you can repay your loans on time, and even consolidating your debt are ways to reduce your business’s debt efficiently.
If you require further help reducing your debt, it’s a good idea to reach out to a finance or debt specialist to find workable solutions.
9. Don’t get a business loan just because.
Finding out you qualify for a business loan is exciting, especially when money is tight. However, before getting a loan, it’s important to ask yourself if it’s something you really need. Are you in the middle of expanding? Do you currently need to buy important pieces of equipment? Or are you just planning on getting a loan “just in case” you need it?
If the loan is something you don’t genuinely need and/or can’t afford at the time, never say yes to borrowing money. Lending money isn’t free; not only do you have to eventually pay it back, but more often than not, you have the interest to pay back on top of it. In addition, note that taking out a business loan isn’t necessary and should be a last resort option only when necessary.
10. Compare your financial standing year after year.
Not every business owner is great with accounting nor do all business owners have an interest in doing their own accounting. Whether you or a professional accountant keep track of your business’s finances, comparing finances each year is critical.
How your business’s finances improve or decline over the years tells you a lot about the success of your business and can help you pinpoint where you might be going wrong with managing your business. Maybe you spent too much money this year, or last year, you didn’t put enough money back into your business. Find these faults, and improve next time around.
The possibility of your business failing is a bitter pill to swallow. Nobody wants to face defeat; every business owner wants their business to thrive. While there’s no guarantee that any business will survive their early years and be profitable, there’s still a possibility that your venture will be a success with hard work and dedication.
With the latter tips in mind, you’ll be able to have a greater grip on the most critical aspect of your business: its finances. Engaging in the right financial moves is one of the best ways to take the lead over other business owners within your shared industry and eventually achieve financial success.
Young Upstarts is a business and technology blog that champions new ideas, innovation and entrepreneurship. It focuses on highlighting young people and small businesses, celebrating their vision and role in changing the world with their ideas, products and services.