Financial literacy is a key skill for small business owners; it could be the one difference between a successful business venture or joining the whopping 80% of businesses who fail within the first 18-months of opening their doors.
A solid grasp on your business’s financial situation drastically improves your chances of long-term success – you’re better able to plan for the future and avoid many common financial management traps.
Despite it’s importance, it seems many entrepreneurs struggle to get a grasp on their finances.
In a study conducted in Canada, 46% of business owners rated their knowledge of financial management as “sufficient” or “less than sufficient”.
Here are some tips for managing your small business finances and increasing your financial literacy to give you and your business the best chance for success.
This is the most direct approach to combating insufficient financial management knowledge that I’ll give to you.
Start with financial statements. They contain four essential details: cash flow, income statement, balance sheet, and a statement of shareholders’ equity.
Cash Flow: It analyzes operating activities, investments, and financial in/outflow.
Income Statement: It reflects revenue earned within a specific period of time.
Balance Sheet: Provides information related to the business’s assets.
Shareholder’s Equity: This is a statement representing the amount of common and preferred shares financing the business.
Financial statements are a good place to start to drastically increase your financial literacy. They tell you all about your money, where it originated from, how many times it changed hands, and where it is now – this is critical knowledge to have.
Business is business, personal is personal
Draw a line and don’t cross it. Your business finances are one thing and your personal finances should always be separate.
Get a business credit card and a savings account dedicated to your business.
A business credit card serves two beneficial purposes: it gives you a place to put all business-related expenses and it allows you to easily track outlays and maintain control.
A savings account gives you a place to put a certain percentage of each payment from which you can easily pay your taxes from at the end of the year.
Especially when you’re first starting out, you’re going to have to be a bit of a penny-pincher; just not at the expense of pissing off your customers.
While you can’t do much about your fixed costs, you can exercise some financial responsibility in terms of your variable costs – use free, cloud-based software versus expensive branded software; Skype for long distances, barter your services with other professionals, etc.
Web-based accounting software
Managing all your bills and finances can be complicated and stressful. You have two options: contract an accountant or get tech savvy.
Web-based software has the ability and convenience of providing real-time insights into your finances.
In most cases, it’s also free or low-cost. A lot of successful entrepreneurs are heading this direction as spending even a little money on technology is more affordable than hiring a whole other person.
Be on the ball
You are the business owner and, thus, solely responsible for your business. That means it’s up to you to keep track of when and where money is moving, monitor your financial performance compared to previous statements, and project how things are going to go in the future.
The world, and especially the business world, benefits the prepared. Taking the time to inform yourself of everything that is happening with your business is a must.
Plan for the future
Being prepared means being ready for the tough times. We live in a volatile economy – one day everything is great and the next it seems there’s a global economic panic.
Have a risk strategy in place in case there is any turbulence in the business environment.
Audit your supply-chain
This is where having a careful eye on your financial statements comes in handy. Look at where your money is changing hands and identify unnecessary middle-men that are driving up your costs. Cut them out if you can.
Move from paper to devices
You’d be surprised how much you can save by deciding to go paperless (and it’s good for the environment too). Smartphones and tablets are efficient ways to circulate documents, efficiently file important paper work, and they also boost productivity.
Giving your employees and customers access to what they need instantaneously does wonders for your bottom-line.
Get your money!
It’s insane how much money get’s lost due to slack invoicing. Send out invoices as soon as possible and stipulate that payment must be received within 7-days (this helps make sure payments aren’t lost or forgotten).
Also, don’t be squeamish when it comes to following up. You provided a service and you deserve to be paid.
Don’t go too big too fast. It’s easy to fall into this trap when things start to go well, but don’t make huge investments in professional sign writing, marketing materials, cars, office space, and the like before the actual revenue comes in.
Just because things are going well now doesn’t mean there won’t be an unexpected dip in the near future. Make sure you’re able to handle and survive it.
As a small business owner, the odds of success are against you.
Being “in the know” financially can dramatically increase your odds of success. While it may seem overwhelming at the get go, starting with the content in this list and expanding your knowledge from there will get you to where you need to be.
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