Your company’s financial health is more than making sales. Keeping on top of money management and keeping your business on a solid financial base is one of the most challenging and important aspects of company ownership. Finally, half of all small businesses fail in the first five years.
Different companies are successful for different reasons, but according to the Center for Financial Services Innovation (CFSI), an individual’s personal financial health is critical to their ability to start, manage and expand a business. It is not just about keeping your business in the background, but also about keeping your own portfolio healthy. Here are our favorite financial tips to help you and your small business thrive:
Know your numbers.
The best way to ensure that your business remains solvent is to live up to your numbers, including revenue, expenses, payroll, overhead, etc. “I’m not a numbers person” is no excuse. Learn to read spreadsheets and balance sheets, create financial models and project sales – and be sure to take into account all related additional costs. If you want to know about financial models read through this awesome guide by WallStreet Prep.
If sales grew because you improved your signage, invested in online ads, or sponsored a community event, your marketing is working! But be sure to also analyze how much you have spent on your additional revenue to find your return on investment (ROI). This is how you will know if you will make these same expenses next time.
Track your billing.
The faster you send invoices, the faster those payments will reach your bank account. Calendar time every week to release your invoices. The more you let go, the more you will hate (and procrastinate) the process, which means a longer wait to collect. Or, better yet, automate your invoice by setting up recurring billing. Check out this infographic from PaySimple on what the billing day looks like for a business owner with recurring billing vs. manual billing.
And you can also set up recurring invoice payments, not just send them. Keep in mind that late payments and balances mean late charges and interest, which can deplete your reserves quickly – and generate a heavy bill from the IRS. Pay company taxes on time, track your monthly invoices, and consider setting up an automatic payment plan for your company’s bank accounts.
Meet your financial obligations.
Your financial obligations are probably not limited to utilities and the IRS. As of 2017, small businesses employed nearly 60 million Americans, with rising labor costs easily accounting for up to 70% of total business costs. It is important to know that failure to pay payroll is a violation of the Fair Labor Standards Act (FLSA) – leaving you in a situation where employees can process due wages.
Paying your employees is a priority and having a budget and automating invoices are just the first steps to making sure you have enough money available. Not sure where payroll costs should fall? A good general rule of thumb is no more than 20% to 30% of gross revenue.
Keep business and personnel separate.
While many entrepreneurs use their own savings to finance start-up costs, it is good practice to set clear boundaries as your business grows. Establishing your company as a separate legal entity protects your personal assets from being trapped in the event that your company goes bankrupt or issued.
Having a separate business credit card and checking account also makes it easier to separate business and personal expenses (an advantage, as many business expenses are tax-deductible). Write business expense checks from your business bank account, pay a salary from your business account, and track all expenses – instead of using your personal card.
Track expenses in real-time.
Speaking of expenses: do you throw receipts in a shoebox (real or virtual) and order them once a year? Break that habit now. As soon as you spend money, whether on supplies, shipping, or any other commercial expense, register it. Use any system that works for you and/or your team: an application like Concur or Shoeboxed or a low-tech spreadsheet that lists dates, what you bought, amounts and expense categories.
Create your business credit.
All financially healthy companies have one thing in common: a strong understanding of credit products and experience in using them. The possibility of accessing commercial credit can be a “do or not” time for your business, especially if the unexpected happens.
According to the US Small Business Administration, 45% of small business owners are unaware that they have a commercial credit score, while in fact, their companies have a credit capacity that is 10 to 100 times greater than personal credit. Having commercial credit means that you will not need to rely solely on personal credit to obtain financing and you will be able to obtain much larger loans from the bank.
Start creating your business credit score using some of the tips mentioned earlier, how to open a business account. Make sure your credit value remains high, your debt value low, and that payments go on time – always.
Minimize your overhead costs.
Do you really need that monthly subscription for video editing software or can you find free tools to get most of the result without the ongoing cost? Set a calendar reminder to reevaluate each subscription service a few days before the second charge is scheduled to reach your credit card.
And if you don’t find the tools you need or don’t have the extra money in the budget for a monthly subscription, consider making your own. Open-source software is available online for small business owners to download and use at no cost. Find and customize free customer relationship management (CRM) tools, accounting applications, or even create your own content management system.
Optimize your workforce.
“Working smarter, not harder” is not just a corporate slogan. Optimizing your workforce is knowing how your employees work and how to best leverage them to achieve your business goals. If you don’t already use one, optimize your workforce with a timing app.
This will make it easier for employees to watch and more difficult for them to punch. Check the scheduling software to ensure that your best employees are at peak hours and that you are not paying constant overtime. But don’t forget: optimizing your workforce is not just about helping your employees work better. Take advantage of your company’s greatest resource: you.
Spend your time on the parts you are good at. If you worked in public relations, use your contacts to get media coverage. Marketing specialist? Learn how to use targeted Facebook or Google Adwords ads to attract new customers. Workforce optimization means making the best use of the right resources, including yourself.
Focus on employee well-being.
Running a business is stressful. But your company will not be financially successful if your employees are also stressed and detached. Employees who feel engaged, respected, and motivated at work outnumber their dissatisfied colleagues in the long run, with engaged employees who outnumber unengaged employees by 20%.
Losing a single full-time employee can cost your company nearly $ 2,500, not to mention the time you spend recruiting and interviewing someone new. So while it’s easy to get distracted by the daily demands of owning as an example, essay writer business, don’t lose sight of the team’s greater effort. Take time to talk to your team, show your appreciation, and remind them of what you all have in common: building a great place to work for everyone.
Create a business emergency fund.
With little money? You are not alone; half of all small businesses have a cash buffer of less than a month. Company revenue is not always predictable, and securing a loan from the bank or family can take time. Experts suggest that business owners have three months to one-year expenses set aside for emergencies.
Whether it be paying the payroll when money is scarce or dealing with unexpected repairs, having extra cash available, also called “retained earnings”, can give you room to make good decisions – not just panicked decisions.
But not all is sad and bleak: a commercial emergency fund can give you a chance to invest in a surprise growth opportunity or hire more employees quickly. Saving money can be counterproductive, especially if you’re already operating with thin margins, but it’s worth it.
Don’t forget to take care of yourself.
Owning a small business has been called “one of America’s toughest jobs”. While you focus on doing everything you can to keep your business healthy, it is important to take care of yourself financially in the process.
Banks consider your commercial credit score for loans, but they also analyze your personal credit history. Make sure your personal accounts are in order and that you are not behind on your bills, which can negatively affect your credit score. If you used your savings to start your business, work to increase it a little bit at a time.
Running a business also doesn’t mean you have to stop thinking about retiring. Small business owners can open an SBO-401 (k), or “independent” 401 (k) and continue to save for the next big investment – the future.