Small and mid-sized businesses often thrive on the strength of their product development and service delivery expertise. However, business owners may not possess the required expertise in other critical areas, such as financial management. This can pose a challenge, particularly when managing business finances is not their forte. Ensuring your business’s economic well-being can be achieved through two effective approaches: education and organization. Effective financial management stabilizes the company and reduces the likelihood of failure.
The following is a guide on developing sound financial habits to set your business on the path to success. It advises business owners seeking guidance on managing their company’s finances, including paying oneself, maintaining good credit, monitoring bookkeeping, and planning.
- Focus on both expenditures and ROI.
Small business owners must track their expenses and return on investment (ROI) to make informed investment decisions. By evaluating the ROI of each expenditure, business owners can identify which investments are profitable and which may not be worthwhile to continue. Neglecting to do so can lead to losses from unwise or unnecessary spending. Therefore, it is crucial to know where your money is going and how your investments contribute to your business’s success. If an investment is not paying off, you must reduce spending on that initiative and instead allocate resources towards strategies that have proven effective for your business.
- Track all tax-deductible expenses.
Tracking all tax-deductible expenses is crucial to managing your finances as a business owner. You can maximize your savings and minimize your tax liability by keeping a detailed record of all tax-deductible expenses. Tax-deductible expenses may include equipment and supply purchases, business-related travel expenses, advertising and marketing costs, and others. It is essential to keep all invoices and receipts related to these expenses and organize them properly for tax purposes. This will help you claim deductions accurately and avoid any potential audit-related issues. Tracking tax-deductible expenses is an important aspect of financial management and can help you save money while ensuring compliance with tax laws.
- Track your cash flows.
One of the key best practices for financial management for SMEs is to track your cash flows. Cash flow tracking helps SMEs keep tabs on their cash inflows and outflows, enabling them to plan their financial activities effectively. With accurate cash flow tracking, SMEs can monitor their expenses, assess their liquidity, and make informed financial decisions. This includes identifying areas where they can cut costs or increase revenue, such as renegotiating supplier contracts or diversifying their product offerings. By maintaining a clear picture of their cash flows, SMEs can avoid financial instability, and cash shortages, ensuring their long-term success.
- Maintain an employee expense policy.
An expense policy is a set of guidelines that outline what expenses employees can incur on behalf of the organization and how those expenses should be reported and reimbursed. Here are some steps SMEs can take to maintain an effective employee expense policy:
- Create a Clear Policy: SMEs should create a clear and concise expense policy that outlines what expenses are allowed, the approval process, and the documentation required for reimbursement.
- Communicate the Policy: Once the policy is created, SMEs should communicate it to all employees. This can be done during new employee onboarding and through regular reminders.
- Enforce the Policy: SMEs should enforce the policy consistently to ensure compliance. This includes denying reimbursement for expenses that are not allowed under the policy.
- Regularly Review and Update the Policy: SMEs should regularly review and update their expense policy to ensure it aligns with their business needs and industry regulations.
- Use Technology: SMEs can use cloud-based expense management software to automate expense reporting and reimbursement. This can reduce the administrative burden and ensure compliance with the policy.
By maintaining an effective employee expense policy, SMEs can reduce the risk of fraud and noncompliance, save time and resources, and promote accountability and financial transparency.
- Separate your personal and business accounts.
When starting a business, it is important to maintain a clear separation between your personal and business finances. This means you should establish separate checking accounts or use business credit cards to manage your finances. By doing so, you can avoid confusion and ensure you clearly understand your business’s financial situation. It is also important to track any personal expenses you incur for business purposes. For example, if you use your personal phone or computer for business, keep track of those expenses and reimburse yourself from the business account.
Educating your employees and partners on the importance of separating personal and business finances is also crucial. By establishing clear guidelines and expectations, you can avoid potential issues and ensure everyone is on the same page. Treating your business as a separate entity and maintaining a clear separation between personal and business finances can help you stay organized, make informed financial decisions, and set your business up for long-term success.
- Set an outstanding limit for each client.
SMEs often have limited resources and may have different financial flexibility than larger corporations. As a result, managing cash flow and minimizing financial risks is critical for their survival and success. By setting an outstanding limit for each client, SMEs can prevent customers from accumulating excessive debts and defaulting on their payments, which can strain the company’s finances and damage its reputation.
SMEs should first analyze the creditworthiness of each client and establish a limit based on their payment history, financial situation, and credit score. The limit should be reviewed regularly and adjusted as necessary. SMEs should also establish clear policies for managing outstanding balances, including when to issue reminders, suspend further credit, and initiate collection efforts. By consistently adhering to these policies and procedures, SMEs can avoid costly mistakes and ensure that all clients are treated fairly.
- Analyze category-wise expense reports every week.
Access to expense data benefits businesses as it enables them to accurately analyze their spending patterns and take swift action where necessary. By tracking and monitoring expenses regularly, businesses can identify areas where they are overspending and make changes to reduce costs. This not only helps to control expenses but also ensures that the business remains profitable.
By knowing exactly where their money is going, businesses can make informed decisions about allocating their resources and investing in growth opportunities. This can ensure long-term sustainability and success for the business. Moreover, effective expense management can help businesses to establish a solid financial foundation that supports growth. By understanding their financial situation and controlling their expenses, businesses can make more strategic decisions about where to invest their resources and how to expand. This can help businesses to scale up their operations and increase their profitability over time.
- Keep good business credit.
As your business expands, you might consider acquiring additional insurance policies, more commercial real estate, and more loans to support such ventures. However, having a weak business credit score can make obtaining approval for these transactions and acquisitions challenging. To maintain a good credit score, it’s essential to repay all debt financing as soon as possible. For instance, avoid letting your business credit cards carry a balance for an extended period, preferably paying them off within a few weeks. Similarly, only take out loans with interest rates that you can afford. Only seek funding that you can easily and quickly repay. This practice can help you build a strong credit profile, making obtaining future financing for your business growth easier.
- Set up good financial habits.
Setting up good financial habits is crucial for the growth of any business, including SMEs. Here are some best practices that can aid SMEs to develop good financial habits:
- Budgeting: Develop a budget that tracks all expenditures and income, and monitor it regularly to ensure you stay on track. Identify areas where you can reduce expenses and allocate resources more efficiently.
- Cash flow management: Manage your cash flow by tracking all incoming and outgoing funds. Understand the timing of cash inflows and outflows to avoid cash flow gaps.
- Debt management: Manage debt effectively by tracking outstanding loans and making timely payments. Avoid taking on more debt than you can afford to pay back.
- Record-keeping: Keep precise financial records of all transactions, including invoices, payment receipts, and bank statements. This will help you to monitor your financial performance and prepare financial reports.
- Tax compliance: Stay up-to-date with tax regulations and pay all taxes on time. This will help you avoid penalties and ensure your business remains in good standing with the authorities.
- Financial analysis: Analyze financial data regularly to understand your business’s financial health. Use financial ratios and other tools to identify areas of strength and weakness and make informed decisions.
- Hiring professionals: Consider hiring professionals such as accountants or financial advisors to aid in managing your finances efficiently.
By following these best practices, SMEs can build a strong financial foundation for their business, reduce financial risk, and increase their chances of success.
Conclusion
Effective management of finances and cash flow is crucial for any business and should be an integral part of your overall business strategy. With a proper understanding of the financial aspects of your business, it becomes easier to keep your company to achieve its objectives. As your business grows, the complexity of financial management increases. Thus, having a reliable financial management tool is essential for ensuring that your business can continue to adapt to the evolving economic landscape and achieve its full potential. With the right financial management software, you can develop the necessary financial capabilities and strategies to take your business to the next l