Finance August 25, 2015 Last updated October 8th, 2021 5,010 Reads share

8 Financial Management Tips for Small Business Owners

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Running a small business is never easy. It seems that there are an endless stream of problems to deal with and administrative tasks to be taken care of. However, there is a way through the fog that can descend over business owners who feel like they do not know which way is up.

What can be especially difficult is keeping a tight rein on the financial side of things. Often business owners lack the experience with accounts, having never worked in an accounting firm before and so make many rudimentary mistakes along the way.

Here we outline some financial management tips to help small business owners navigate the tricky financial waters so their businesses can thrive:

#1. Create a Realistic Budget

Financial budgets within a business are often treated like a chore and an unnecessary piece of paperwork to handle. This is not the case at all. Just like with a business plan that is only good on paper until the business gets off the ground, a budget at least lays out what the financial plan is moving forward.

It acts as a guiding hand rather than locking the owner into certain decisions ahead of time. A budget can also indicate more clearly whether projected income levels will be sufficient to handle the ambitious capital expenditure plans to expand the business in the coming year. This can then highlight whether marketing needs to be pushed harder or expansion plans need to be scaled back if it is not believed that sales will support the desired level of spending.

#2. Don’t Treat the Business Like Your Personal Piggy Bank

Whilst it can be tempting to buy a fancy company car or an upgrade to the latest computer hardware, one of the biggest mistakes a young business can make is spending too much in the early years. Overspending beyond the expected numbers from the budget (see above) can create a shortfall which business cash-flow may be insufficient to handle. Lines of credit may also not be available from the not-so-friendly local bank and all of a sudden the business is in a financial crisis of its own doing.

Put yourself on a salary and learn to live on that amount. If the business makes a reasonable amount of profit, consider paying out an end of year dividend to the shareholders to distribute a portion of the profits while reinvesting the rest towards the future growth of the business.

#3. A Place for Everything and Everything in its Place

Do you know where all your invoices, credit notes, bank statements and other financial documents are located? Are any missing? Lost or incomplete records can create a major problem for an organization. Computerized records ensure that should the business premises suffer a fire overnight, the accounting records won’t be lost if there are computer backups off-site or accounting is conducted online in the cloud. QuickBooks is an excellent solution for the desktop and cloud-based accounting needs of small businesses.

#4. Managing Debts Effectively

When businesses are run partly using financing to expand, this debt needs to be managed well. Business debt management is something that needs to be properly understood including knowledge of the different finance options available for small businesses and how much the financial solutions will cost.

#5. Maintain Separate Business and Personal Accounts

It can be tempting, especially for new business owners, to not bother to keep records separate between business finances and their personal affairs. Whilst this might seem like a simplistic and simple way to handle things, ultimately it can create a confusing mess for any accountant who has to deal with the problem later. If paying for an outside bookkeeper to run through the numerous personal transactions, it can also be quite costly to process the account statements to isolate what is related only to the business. Keep accounts separate from the start and avoid the problem altogether.

#6. Run a Lean Operation, Not a Flashy One

Fixed costs are things that cannot be avoided once the money has been spent. For example, some businesses decide to buy the building that they operate from even though it will sap their available cash to do so and may require a business loan to complete the transaction. Only later do they hit hard times and really need to pull the money back out that has been sunk into the commercial real estate.

Keep costs lean by avoiding as many capital expenditures as possible. Do you need the fastest computers or to upgrade them every two years? Do employees need to travel to branch meetings or can they meet virtually over a group Skype connection instead? Don’t wait for times to be tough to start cutting back. That is when it is too late. Always be lean with the expenses so that there is flexibility to tighten the belt further when the economy is not doing so well.

#7. Don’t Expand the Staffing Too Fast

Employees are great to have, but they ramp up the costs to the business really fast. There is the salary, the taxes, desk and other furniture, computer, etc. The indirect costs of each employee can actually exceed the salary.

Consider outsourcing, either in-county or internationally, in order to avoid many of these associated costs. Pay per task or per hour. Freelancers effectively pay for their own office space, equipment and internet connection, plus they will often cost less than the real cost of the equivalent employee. It is also possible to hire different freelancers for small jobs consisting of a few hours only rather than trying to find one person who can do everything which is an impossible thing to find.

#8. Keep a Tight Rein on Accounts Receivable

Ensure that as the business expands, the accounts receivable doesn’t expand too much with it. At the very least, be careful to ensure that the average number of days that invoices are outstanding doesn’t grow over time along with expansion. Keep a keen eye on the money that is due to come in and make sure that it does. You don’t want any bad debts because companies slow-walked the payment right before they went into receivership.

Managing the finances of a business takes discipline, systems and controls, and the desire to manage them well. Keep business separate from personal accounts, and don’t be afraid to use plans. You don’t have to stick to them but they will help you.

Images: “Royalty Free Photo”


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Boris Dzhingarov

Boris Dzhingarov

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