Last Updated on May 21, 2021 by MoneyVisual
On paper, the very phrase ‘managing small business finances’ may seem like something simple. After all, how much work could it take to run anything in a small business? Well, you would be surprised to learn that these things don’t scale down exponentially, which means that paperwork-wise, there’s isn’t that much of a difference.
As for the cost of an error, let’s just say that in a world where 9 out of 10 startups fail within their first five years of doing business, even a minor mistake can turn out to be incredibly expensive. With that in mind, here are several tips for managing small business finances.
Don’t Run as a Sole Proprietorship
The first thing that not a lot of people tell you about running a small business is the fact that you need to separate personal from business-related funds. This is why running as a sole proprietorship is a bad idea. Even though you need to be optimistic about your plans, the truth is that the majority of startups fail.
No, this doesn’t happen just to people who are not smart, capable or talented enough. Even Walt Disney and Abraham Lincoln went bankrupt at one point in their life, yet they’ve managed to bounce right back. Just take these several steps of precaution to separate your personal assets from your business-related funds, just in case things unexpectedly go wrong.
Know where it’s Safe to Cut Costs
Another thing you need to understand is the fact that in order to run a small business, you need to lead a frugal life, which usually means cutting costs. The biggest problem with this idea lies in the fact that you need to know where it’s safe to cut costs.
For instance, if you refuse to give out bonuses or start underpaying your staff, you’ll see massive talent abandonment. If you start cutting down on supplies, the quality of your products will diminish. In other words, be frugal but don’t insist on frugality at any cost.
Keep All the Records
One of the most important tips you have to keep in mind is the fact that you need to keep all your tax records for at least seven years. However, if they’re in digital format, there’s no reason to ever delete them. If you decide to outsource this function to an outside agency, this will, most likely, be taken care of for you, yet, it’s always good to be sure.
This is important for more than legal precaution measures. You see, by keeping all of this raw data, you’ll get a better chance of making an adequate financial projection later on.
Create Multiple Streams of Revenue
While re-investing is a good thing, you need to understand that putting all your eggs in a single basket never seems to be a good idea. This is why you need to diversify your portfolio and use some of your assets to create multiple streams of revenue or secure some of your funds.
This way, even if your small business starts going south, you have other assets to keep it afloat or reinvigorate it. Other than buying stocks, day trading, and similar, you should consider investing in commodities as well. Gold and silver may be a standard choice, yet, nowadays, more and more people are opting for precious metals like platinum or palladium.
Burning Cash is a Good Thing
In order to run a business, you need to burn money. Your employees need bonuses, your office needs new equipment and your marketing needs to expand exponentially when your business is growing linearly. You see, some first-time entrepreneurs believe that frugality and austerity are the only two ways for a business to be profitable, yet, you need to understand that hoarding money usually isn’t a good idea.
The reason why this would ever be problematic is due to the fact that some people simply don’t know how to manage healthy cash flow. Once you master this subtle art, nothing will stand in your way for long.
Don’t Trust People with Your Assets
Greed is a part of human nature and if you give someone an opportunity to use corporate resources in order to save their own resources, chances are that they will take it. For instance, if an employee could use a corporate vehicle to go on a personal errand, they won’t have to waste gas that they’ve paid for, right? Others tend to steal office supplies to avoid spending money on them, while those with greater access to corporate funds may steal staggering amounts before anyone notices anything.
Most importantly, time is money and corporate time theft is a serious issue. Wasting time, stretching employee hours and taking some me-time during work hours are all corporate theft (in a way). The problem lies in the fact that a lot of first-time entrepreneurs aren’t even aware of just how serious this can be.
As you can see, by sticking to these several simple tips, you’ll take all the most essential steps of precaution in order to ensure the longevity and prosperity of your business. Of course, your business model is the one that will determine the success of your business but healthy finances are always a base for future growth.