Money Management for Small Business Owners
According to a study conducted by IBM Institute for Business Value and Oxford Economics in 2021, around 90% of Indian startups fail within the first five years. This high failure rate is attributed to various factors ranging from insufficient funding, and poor business planning to inadequate mentoring, lack of market demand, and stiff competition. Proper financial management can majorly help you avoid these pitfalls.
As it is rightly said that effective money management can make or break a business’s success. Infact, effective money management is the bedrock of success for small businessess. It is because small business owners often spend most of their time handling daily operations and growing their business, leaving little time to focus on managing their finances.
So, here we list down a few smart practices to adopt that can help you navigate your finances effectively as a small business owner.
Develop a Business Budget
Start by determining your monthly fixed and variable expenses, such as rent, salaries, and marketing costs. Track your expenses regularly and adjust your budget as necessary. It is a preliminary step inorder to manage your finances effectively as a well-structured budget is essential for tracking income and expenses.
You can begin by listing all expected revenue sources and expenses, including fixed costs (e.g., rent, utilities) and variable costs (e.g., inventory, marketing).
A business budget will also allow you to anticipate cash flow needs and make informed financial decisions.
Monitor Cash Flow Regularly
Cash flow management involves tracking the money coming in and going out of your business. Regularly monitoring cash flow helps identify potential issues early and ensure that you have enough liquidity.
For example: Regular cash flow can help you notice a seasonal dip in sales, she adjusted her inventory orders and marketing strategies to maintain healthy cash flow throughout the year.
Separate Personal and Business Finances
It’s crucial to keep your personal and business finances separate. Maintain Separate Accounts.
Open a dedicated business bank account and use it exclusively for business transactions. A study by the National Small Business Association (NSBA) revealed that 57% of small business owners found it easier to track business expenses and deductions when they maintained separate financial accounts.
Keeping business finances separate from personal finances helps prevent any confusion and ensure accurate financial reporting.
Separate business accounts also make it easier to manage taxes, manage income and expenses, and prepare financial statements.
Set Aside Funds for Taxes
Tax obligations are inevitable for business owners and it makes tax planning a necessary skill for every small business owner. Plan to set aside a portion of your revenue for taxes regularly to avoid last-minute surprises.
Build an Emergency Fund
Build an emergency fund to cover your business in case of unexpected expenses, slow periods, or cash flow deficits. Strive to set aside 6-12 months of living expenses in case of any essential needs.
Manage Business Debt Wisely
While it is true that debt can be a tool for growth, it should be managed carefully. Keep track of the outstanding loans, interest rates, and repayment schedules.
It is also significant to consolidate high-interest loans into a lower-interest business loan. This strategy reduces interest expenses and improves cash flow.
Consult with Financial Experts
Don’t hesitate to engage financial advisors or accountants to help you navigate complex financial matters, especially during growth or financial challenges.
A financial advisor can help create a strategic financial plan, resulting in sustainable growth and profitability.
Effective money management is the backbone of small business success and it is essential to prioritize your business’s financial health for long-term success. Start implementing these practices today, and let them guide you toward financial stability and growth as a small business owner.