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If you’ve ever played Monopoly, you know that with only $1500 to start the game (according to the latest rules), you’ve got to manage it properly. It’s the same for businesses in the real world.
Finances are the lifeblood of any business. Small businesses typically start out with a small amount of funds, which means owners need to have the right skills to stay on track.
According to LendingTree, around 20% of new businesses fail within their first year. And the top reason for these failures? Cash flow problems. The costs of doing business present a variety of hurdles for small business owners, but the good news? If you follow these financial practices, you might keep your company from becoming just another statistic.
1. Keep records of everything
Choose the right accounting software and keep records of all financial transactions, inventory, payroll, accounts payable/receivable, etc. This isn’t just a finance tip for small businesses - it’s necessary for the survival of every person and organization. Records make filing taxes easier and give you a realistic look at your financial health.
2. Separate business from personal
Because most small businesses are self-funded, this is one of the top financial mistakes small business owners make. When both you and your business are struggling financially, it can be tempting to mix money between the two. Resist that temptation, as it can very quickly sink a business —taking you down with it. Any money spent on personal items and experiences should come from your salary, not the business fund.
3. Maintain a budget
Without a proper budget, it’s impossible to plan for future expenses. A budget gives control over the business and gives you a chance to evaluate how the business is doing compared to previous periods. As mentioned above, accounting software is available, so there’s no excuse not to keep an accurate budget for your business.
4. Remain in-house whenever possible
Many roles can be outsourced to agencies and freelancers but can be prohibitively expensive. Keeping work in-house doesn’t always save those costs, but tracking employee production and work quality and maintaining trade secrets is easier. This level of control ensures you get the most bang for your buck on the money you spend.
5. Track marketing and advertising ROI
How much you spend on advertising depends on the kind of business you run. The U.S. Small Business Administration (SBA) lists varying budgets ranging from 1-12% for companies. The most important thing to keep in mind, though, is that your advertising budget shouldn’t be spent aimlessly. Take the time to accurately measure and prove an ROI for every marketing dollar allocated.
6. Invest excess liquidity
A positive cash flow can help in several ways, including reinvesting in the company. When your business is profitable, consider investing in R&D, physical assets, IT, employee benefits, and PR. Having spare cash in the bank can also be useful in staying ahead, but some of that money can even be invested in other business stocks, bonds, and vehicles. Consult with a professional money manager to determine the best ways to invest your money while you have it.
7. Shop for credit when you have money
According to Zippia, banks' small business loan approval rates range from 13.8-19%. Credit issues account for 20% of denials, which points to the likelihood that many small businesses wait until they’re in trouble before applying. It sounds counterintuitive, but the best time to apply for a business loan is when your business is doing well, and you will most likely be approved. You’ll be able to keep up with repayments while saving money for a rainy day.
8. Monitor operational expenses
Budgeting isn’t a one-time deal. Operating expenses need to be constantly monitored so you can discover ways to save money potentially. If a supplier or utility raises prices, start shopping for better deals. Routinely negotiate your bills and make a point to understand any fluctuation in expenses, especially recurring ones. Doing this proactively can save you money in the long run.
9. Leverage free software
Software is expensive, especially when you factor in implementation, training, maintenance, and support costs. Thankfully, plenty of free options are available for everything from spreadsheets and word processing to communications, marketing, employee time tracking, and more. Don’t spend money on software unless there’s no free alternative available. Be sure to check the terms and conditions before you decide to use "free" software, however. Sometimes a no-cost software platform may award itself rights to your intellectual property that you don't want to give away by using the platform's services. "Free" is not always free.
10. Hire a professional
With all of these financial tips, remember that these practices require your commitment and, in some cases, a financial professional.
It’s normal for an entrepreneur to want to do everything, but that level of multitasking leads to problems. Studies show multitasking causes detrimental health effects like stress, distractibility, depression, and memory loss. It also makes you less efficient and could lead to mistakes at work.
The last place you want to overlook something is in the company’s finances, so hire an accountant or bookkeeper as a dedicated team member. The payoff will be building a solid foundation for your operation to grow and thrive for years.
For more information
For more information to help your small business, check out the BBB business news feed and the BizHQ.
BBB Great West + Pacific and BBB Metro New York contributed to this article.