Financial Management Tips For Small Business Owners

Effective financial management is crucial for the success of any small business.

By investing in an in-house team dedicated to managing finances, budgets, taxes, and accounting, businesses can make informed decisions on where to invest and grow.

In today’s economic climate, with tighter profit margins and volatile trading conditions, robust financial management processes are even more critical. Unfortunately, many startups attempt to operate without working capital or contingency funding, leaving them vulnerable to financial instability.

Budgeting is also often overlooked, leading to poor management of accounting and finances and contributing to eight out of ten businesses failing within the first year. Therefore, it is essential for small businesses to prioritize their financial management to ensure their survival and growth.

Core Attributes Of Business Financial Management

So far, we have mentioned the following attributes of financial management:

• Budgeting
• Working capital
• Profit margin
• Contingency funding
• Taxes
• Investment

Let’s quickly look at what each component means for businesses managing their accounting and finance management.

Budgeting

Budgeting is creating a business’s financial plan, outlining its anticipated revenues, expenses, and cash flows over a specific period. It involves estimating income and allocating resources to different organisational activities or departments.

Budgeting helps businesses set financial goals, track performance, and make informed resource allocation and spending decisions.

Working capital

Working capital refers to the amount of capital available for day-to-day operations and short-term financial obligations of a business. It represents the difference between current assets (such as cash, inventory, and accounts receivable) and liabilities (accounts payable, short-term debt).

Working capital is a measure of a company’s liquidity and its ability to meet short-term financial obligations.

Profit margin

Profit margin is a financial metric that measures a company’s profitability by determining the percentage of revenue that translates into profit. It is calculated by dividing the net profit (revenue minus expenses) by the total revenue and multiplying by 100.

Profit margin indicates how efficiently a company converts its sales into profits and is commonly used to assess profitability and compare the financial performance of different companies or industries.

Contingency funding

Contingency funding refers to setting aside funds or creating a reserve to address unforeseen events, emergencies, or unexpected expenses that may arise in the future. It involves planning for contingencies such as economic downturns, natural disasters, regulatory changes, or other risks that could impact a company’s financial stability.

Contingency funding helps businesses mitigate potential financial risks and ensures they have resources available to navigate challenging circumstances without compromising their operations or financial health.

These terms play important roles in business accounting and financial management, providing insights into financial planning, performance evaluation, and risk management.

However, entrepreneurs with more experience know they can invest in recruiting a team of accounting professionals and commit to further training and financial education in management.

Preventing insolvency and bankruptcy is key to what comes next in an entrepreneur’s career.

Financial Management Tips

While the basics of financial management are not readily part of compulsory learning for students, a lot of information is available when you search online. Use the following tips to get your startup or SME in sound financial working order.

Always separate personal finances from the business finances

Linking personal credit cards and bank accounts to the business is terrible. Keep them separated. Open up a business account, and carry business-specific credit cards for all charges accrued by the organization.

Opening a savings account for the business is also a good idea. Emergencies always happen at one point or another and tend to cost money. Weaving personal finances into the business finances can get quite hairy and should be avoided.

It helps to run a thrifty organization

Running a “lean” organization will pay off when all is said and done.

Fixed costs are those expenses that cannot be avoided or acquired at a less expensive price. However, you can negotiate your fixed costs and choose the most competitive service for your workplace, technology, sales, and marketing campaigns.

Reduce your workplace expenses

The pandemic was a wake-up call to businesses unable to operate with their staff working remotely.

Once they fast-tracked their digital adoption to use subscription services to manage cash flow and provide secure remote access, businesses realized they didn’t need the premium ample office space.

Downsize to a smaller commercial workplace and embrace the other benefits of remote working.

Cloud-based accounting software is well worth the investment

There are a lot of cloud-based subscription software platforms for accounting, payroll, and financial management.

The convenience of cloud-based access cannot be matched. Web-based financial software provides real-time insights, tracking, and updates for businesses of all shapes and sizes. Conveniently work on financial documents from anywhere at any time with various mobile devices.

Proper performance monitoring is helpful

A lack of proper performance monitoring can lead to huge financial losses and holes in the company’s reporting. It is critical to maintain a watchful eye over all the ins and outs of the business’s financial dealings.

Proper performance and financial documentation can provide a more accurate picture of what is and is not working for the business. The ebb and flow of finances will help owners make more practical financial decisions for the future.

Hiring the best of the best

Hiring the most competent professionals in their field will build the most functional and capable business team. Take the time to vet out just the right talent for the organization.

Summing Up

Today there are many more ways to reduce costs to cope with inflation and manage the business more efficiently.

Technology aids startups with less initial outlay to use the same apps and systems to compete for customers. Overgrowing and generating a healthy contingency fund for emergencies is one reason to invest in a team of accounting and finance experts for your new business.