As a business owner, you need more than just great products and services to stay ahead of the game. One of the most critical aspects of running a successful venture is managing your finances like a pro. Regardless of the size or nature of your business, keeping your financial house in order is a must for long-term stability and growth.
Fortunately, managing your business finances does not have to be an uphill task. Like most entrepreneurship skills, you can master this area by following a few tried-and-true measures. In this blog, we will share all the insights to keep your business finances in tip-top shape.
Conduct Regular Audits
An audit helps evaluate the efficiency of internal controls implemented within an organization. It helps identify gaps in the control system, eventually reducing the risk of financial mismanagement. Transparent financial information obtained through audits improves decision-making as well. Management can rely on this data to gauge the organization’s financial health, allocate resources properly, and make long-term strategies.
While certain industries and sectors have mandatory audit requirements due to regulatory obligations, others may not have such strict regulations. As a result, they may choose not to undergo audits. Cash-intensive businesses are the biggest examples of that. However, this can result in major financial issues, and the IRS may get involved. Therefore, conducting regular audits is mandatory. If you do not know how to go about the audit of your cash-based business, an extensive Cash Intensive Business Audit Guide might be the perfect solution for you.
Separate Personal And Business Finances
Most entrepreneurs mix personal and business finances. One of the primary reasons behind this is the perceived convenience it offers. When starting a small business or operating as a sole proprietor, it may seem easier to use personal bank accounts and credit cards for business transactions. It eliminates the need to open separate accounts and reduces administrative tasks. While this strategy may offer temporary convenience, the long-term consequences could be detrimental.
For example, not separating personal and business finances creates confusion during tax season. It becomes difficult to identify and substantiate business expenses, potentially leading to missed deductions or non-compliance with tax regulations. In a worst-case scenario, it might even result in penalties and fines.
Moreover, lenders and investors typically require clear financial records and a separate business credit history to evaluate your business’s creditworthiness and financial stability. Therefore, mixing finances may keep you from qualifying for business loans, lines of credit, or investments.
Create An Emergency Fund
Uncertainty is a constant companion of a business. No matter how well you strategize, unexpected challenges can rear their ugly head at any moment to test your resilience and financial stability. That is where an emergency fund can come to your rescue.
An emergency fund is a pool of money set aside specifically to address unforeseen circumstances or urgent financial needs in your business. Simply put, it provides you with peace of mind and the means to navigate unexpected situations without derailing your operations or plunging into debt.
If you do not know how to get started with creating an emergency fund, consider the following tips:
Start early: Begin setting aside funds as soon as possible, even if it is a small amount. Consistent contributions over time will add up and create a solid foundation for your emergency fund.
Set realistic targets: Determine how much funds you would need to cover expenses for a certain period, such as three to six months. Set a specific amount and gradually work toward reaching that number.
Exert self-control: Do not spend money from the emergency fund until absolutely necessary. Maintain strict discipline in preserving the fund for genuine emergencies.
Review: Your company’s financial standing keeps fluctuating, and so should your strategy for emergency funds. Therefore, it would be wise to periodically assess your emergency fund’s adequacy based on changes in your business’s financial situation and external factors.
Minimize Operational Costs
Operational costs are the expenditures that a company incurs as part of its regular business operations to make money. It involves various aspects of running a business, such as rent, utilities, salaries, marketing, supplies, and maintenance. While these expenses are necessary for the proper functioning of the business, inefficient practices and oversights often lead to wasteful spending and create inroads for poor financial management.
Controlling operational costs starts with creating a solid budget. It will empower you to smartly allocate your available funds to various expenditures. Be sure your budget includes both fixed costs and variable costs. That way, you will be able to identify areas with unnecessary expenses.
For example, let’s say you currently have a team of 10 employees. However, while making a budget for the next year, you may realize that your team is growing and you will soon need an office that can accommodate 20 people. To control this expense, you may explore alternatives like renting a coworking office space.
By leasing only the desk space you currently require and scaling up as your team grows, you can substantially reduce costs. When you carefully analyze the numbers and put them down on paper, you will see how this seemingly small adjustment makes a huge difference in your overall budget over time.
Improve Your Business Credit Score
A business credit score is a numerical representation of a company’s creditworthiness and financial reliability. Business credit scores are commonly used by lenders, suppliers, and other business partners to evaluate the risk of doing business with a company. A higher credit score typically results in faster loan approvals, lower interest rates, higher credit limits, and more favorable terms from suppliers.
You can take a few simple measures to boost your company’s credit score. Firstly, consider diversifying your credit sources. Having a mix of credit types, such as trade credit, loans, and credit cards, positively influences your credit score. Building relationships with various lenders and suppliers can help you build a strong credit profile.
It is also a good idea to check your company’s credit report every now and then to make sure there are no discrepancies that could affect your score negatively. If you detect any irregularities, notify the credit reporting agency to resolve the issues.
When it comes to running a business, the right financial decisions should be made without any delay. There is no grace period for new business owners to settle in. While some entrepreneurs may have prior business experience or solid financial knowledge, many are complete beginners. This guide is meant to serve as a resource for people who may not have extensive experience handling business finances.