Although several businesses and startups emerge every year, not many survive long or manage to meet the 5-year mark. While several reasons can contribute to their failure, the inability to understand and streamline finances is a leading cause.
A brilliant business idea may get you investors and an establishment, but it’s not enough to keep operations running. Most entrepreneurs find financial management complex and mundane, often putting it off for another day. But it’s a time-sensitive job you shouldn’t delay even for a day. Without a system to track your finances, you may miss an opportunity for tax deductions and sometimes even run your business to the ground. However, by implementing an appropriate structure, you can streamline finances, allowing you to review numbers now and then for a quick assessment. This ensures an organization’s efficiency, provides a pathway to attain goals, and allows for the proper allocation of resources.
If you’re unsure how to get started, follow these six tips to help you manage your finances in no time.
- Understand your finances
It’s a common practice for entrepreneurs to hire professionals for account management rather than take on the task themselves. While it’s wise to let the experts do their job, having a basic understanding of your finances is just as crucial. And for this, you don’t need to put your business on hold or enroll in college to gain a professional degree. Instead, you can register for short courses like those offered by Wiley CPA, which provide accounting essentials and all there is to know about it.
- Document financial statements
Financial statements can offer valuable insights into your company’s financial health. This data is critical for making decisions and investing resources in the right places.
There are three documents you must maintain meticulously:
- Balance sheets
These detail all the information regarding a business’s assets, liabilities, and shareholder rights. With this sheet, you can run an internal and external analysis of your company to see its current, previous, and expected performance.
- Income statements
These report all the income and expenses a business incurs over a specified period. Since it outlines profits and costs, it offers a glimpse into which activity generated revenue and which action ended up costing the company money.
- Cash flow statement
A cash flow statement outlines all the business’s cash inflows and outflows to show owners if there’s enough cash to pay expenses and make necessary purchases. Typically, this report shows cash flows from operating, investing, and financing activities.
- Regularly review your accounts
While documenting and maintaining financial records is essential, they’re all for naught if you don’t regularly review them. Whether running an SME, startup, or a large enterprise, every business is susceptible to losses and fraud. Most business owners check their statements monthly or bi-weekly, but that’s not enough. It’s better to habitually assess each financial document every few days, with random audits in between. This practice ensures you stay on track with budget goals, and there are fewer chances of employee theft or other scams in your organization.
- Forecast your cash flow
Forecasting predicts how many sales and expenses you expect to see in the immediate future. But before you begin forecasting, first decide a period for which you want to estimate costs. Companies usually project monthly sales, but this can vary depending on your business and how far it expands. You can start by studying last year’s numbers which provides helpful insights and identifies trends that can assist with a more accurate forecast. However, you can sum up your estimated cash outflows if you’re just starting and don’t have past figures. With this, you’ll better understand how much business you need to bring in to cover these expenses.
- Set aside emergency funds
Inflation, drastic economic changes, political instability, or changes in regulations can all cause chaos in the business industry. Although these result from unprecedented circumstances, it still helps to set aside emergency funds to cover any expenses your company may face. Scavenging money at the last second when things are already challenging is impossible and can prove lethal for your business. But you don’t want to put all your profits into an emergency fund either. Therefore, it’s better to save at least 10% of your annual profits solely as a safety net. Also, carefully consider every investment you make to ensure the cash you spend is worth the cost.
- Use automated payment methods
Traditional transactions using paper money or checks are quickly becoming outdated because of how feasible automation has made payments. Automated payment methods allow organizations and clients to make payments electronically through debit cards, virtual cards, wire payments, or EFT (electronic funds transfer). This system makes processes faster and more efficient for the business and the customer. It makes record keeping much more effortless and prevents you from worrying about getting paid on time. Processing these transactions is also cost-effective and reduces the chances of error significantly.
As a business owner, you and your staff expect you to wear multiple hats in a day’s work. Because of this, it may seem convenient to delegate financial management to someone else or let it go for another day. But managing your finances from day one is crucial to avoid potential mishaps down the road. If you streamline the system and keep everything organized, nothing can stop your business from rising to its glory and success.