Small business owners carry their entire company’s operation on their backs. Production, sales, and finances fall on the owner, even if they hire staff to care for each responsibility.
The United States Bureau of Labor Statistics estimates that 20% of small businesses fail within the first two years. Then 45% fail within five years, 65% within 10 years and 25% keep their doors open past 15 years.
A small business often shuts its doors because it lacks qualified management, a solid business model, or stellar marketing plans. Lack of capital is another. Therefore finance plays a large role in the company’s success.
The following are seven financial tips for new small business owners.
During the first two years of operation, a small business faces its tightest budget. The company must pay its suppliers, business partners, and employees. It may not be pleasant to see the number of expenses. However, a budget is important for setting expectations.
A budget reins in expenses as a small business works to increase revenue. It’s also a great learning experience.
List the company’s expenses and income streams on the budget. Off to the side, list business wants and needs. This is an easy way to see how much needs to be reinvested and where.
There is an array of business software available on the market. It ranges from basic versions to enterprise. The costs start at free and increase into the thousands depending on features, support, and integration needed.
A content management system resides in the Cloud. It’s a centralized system that stores sales, marketing, and financial information. Management systems focus on the sales pipeline to optimize revenue.
The goal is to prevent possible sales from slipping through the cracks. In addition, the CMS optimizes the process. It’s possible to grow a small business with a skeleton crew until it realizes a meaningful profit. Plus, these platforms provide valuable data.
Every transaction generates data. To make the data work for a small business, organize it. Small business owners who integrate a CMS simply need to compile reports from the software.
A small business owner who understands seasonal trends, traffic patterns, and demand cycles can optimize their company financially. It’s possible to purchase raw materials at a discount if you know that demand is heading your way. By turning the raw materials into products and sales quickly, an owner reduces their storage costs too.
The accounting portion of the CMS helps an owner analyze their finances. After a few months, it’s possible to renegotiate contract terms, loan terms, and other costs with suppliers, business partners, and financial institutions.
To optimize a small business’ capital, learn how it works. Lenders, investors, and donors place requirements on the funds. For example, to receive the second round of funding from an angel investor, a small business must accomplish a set of milestones first.
If you plan to sell the company, understand the concept of net working capital. The formula subtracts current liabilities from current assets. Ideally, the difference is positive current assets. The result is the company’s value.
The United States Internal Revenue Service takes business taxes very seriously. Therefore a small business owner must take them seriously too. If you integrate a CMS or accounting software, the programs handle the tax documentation heavy lifting. Then check in with a tax professional.
Tax laws evolve annually. Keeping up with the details and how they impact your small business is a challenge. That’s why tax professionals exist. They’ll review your returns and find qualifying credits and breaks for your business.
It’s tempting to use your personal funds to cover outstanding business expenses. In case of hardship, avoid commingling personal and business finances, especially if you set up a limited liability tax entity.
If things get out of hand, the owner’s assets could become a casualty. Instead, owners whose company requires additional funds can issue a loan. The loan establishes a formal business transaction and paper trail.
To protect a small businesses’ financial interests, invest in insurance. General liability, professional liability, and commercial umbrella are three policies to consider purchasing. Each covers the business owner in case a plaintiff brings a litigation case against the company.
Each policy provides coverage limits. In case a judgment goes against your company, the insurance policy covers the damages.
Small business ownership is an exciting venture that exudes entrepreneurship. Keeping the company’s doors open boils down to spending less than the company earns. If you plan to sell the business, ensure that it receives the correct valuation for the highest return on investment.