Top Small Business Financial Management Tips in 2021
Successful entrepreneurs are almost always good money managers. Even though they may have different approaches to business, they all know how to keep money moving without overextending themselves or running over budget.
Every successful small business owner needs a good understanding of how to keep money moving. The right financial strategy will help to free up cash and organize expenses so that you’ll always have money on hand when the right opportunity comes along.
These financial management tips can help any small business owner keep their books balanced and free up cash for important investments over this year.
1. Optimize Your Monthly Budget
Surprisingly, most small businesses don’t budget — according to one survey, 61% of small businesses didn’t have any kind of official, documented budget in 2018.
Having a physical documented budget will also help you track your budget variance, or the difference between how much you plan to spend and what is actually spent.
This information can make it easier to create predictions about business spending — and give you a better idea of how much cash you really have available for big purchases and investments.
2. Look at Cash Flow, Not Just Profit Margins
Revenue and profit are some of the best indicators of a small business’s financial health — margins of around 5% to 20% are typically a good sign that your business is doing okay.
Profit margins don’t tell the whole story, however. Even if your business is turning a profit, you can still be sunk by big expenses, especially if they come close together or before a big job pays out.
Cash flow is the measure of cash in minus cash out over a specific period — maybe a week, a month or a longer period. Cash flow helps you spot issues with the timing of your spending that may mean that, even though your business is making money, you won’t have cash on hand.
By measuring your cash flow, you’ll know when you’ll be able to spend money, and will be able to more effectively time major expenses so that you don’t limit your spending options.
3. Consider the Resale Value of Investments
Business assets are often resold long before they stop working. To stay competitive, you may need to upgrade vehicles, computers, office tech or machinery — and to renew your fleet, you’ll need to resell the assets you have on hand.
This means that when you buy a new vehicle or computer for your small business, you need to consider both its cost and also how much it will sell for a few years down the line.
Depreciation is inevitable, but you can take steps to maximize the cash you’ll get for reselling a business asset.
For example, how you use an asset like a computer or vehicle while it’s in your possession can have a major impact on retail price.
Documented regular maintenance and shelving upgrades can significantly improve a work van’s resale value, meaning that the cost of a fleet renewal won’t be as bad as it could have been.
The same goes for a device like a phone or computer — minimizing wear and tear or upgrading components, depending on the device, can help to improve their resale value.
4. Keep Business and Personal Finances Separate
It’s best to keep your business and personal finances as separate as possible. By maintaining separate accounts, you can ensure that you won’t be tempted to dip into business funds to pay for personal expenses — or vice versa.
Mixing together these accounts can also have more serious consequences — like increased risk of an audit. By separating them, you make it both easier to file taxes less likely that you’ll run into issues with your return.
5. Automate Bill Payments
As a small business owner, it can be difficult to keep track of all the bill payments you’re responsible for.
Automating these payments means you won’t have to worry about missing a payment. You also won’t have to spend time every month organizing those payments — freeing up some time for more important work.
So long as you have an effective budget and are on top of your business cash flow, there’s no real risk to automating these payments.
6. Build Up Emergency Savings
A rainy-day fund will help you take advantage of unexpected opportunities and weather temporary money issues.
For especially small small businesses, this may mean covering the cost of emergency maintenance on company equipment or a work van.
Having funds that you can dip into when you’re hit with a major unexpected expense will keep you from needing to go into debt — which can save you a surprising amount of money in the long term.
7. Work With an Accountant
This will probably become even more true as your business grows. More employees, more money and more investments — over time, these all become much harder for just one person to manage.
Working with an accountant or accounting firm is also a good way to transition from managing to your own books to bringing on a full-time accountant if your business becomes successful enough.
If your business doesn’t seem big enough to justify an accountant, you don’t have to wait — if you find yourself putting off bookkeeping or business accounting, it may be a good time to start looking for an accountant. Working with someone else will help free up time for the work you’re truly passionate about, and make sure that your business’s books are in good hands.
Best Strategies for Small Business Financial Management
Small businesses need good money management. These strategies are some of the best ways to improve your business’s finances. Simple changes — like improving resale value of business assets and automating bill payments — can go a long way. Other, more substantial changes, like an accountant, can be even better.
Eleanor Hecks is editor-in-chief at Designerly Magazine. Eleanor was the creative director and occasional blog writer at a prominent digital marketing agency before becoming her own boss in 2018. She lives in Philadelphia with her husband and dog, Bear.