5 Tips and Tricks for Managing Small Business Finances Effectively

How well do you manage your business finances? Cash flow problems are the main reason for the failure of 82% of businesses. It could be due to improper management of money coming into and going out of the company. 

In a few cases, it is about the timing. For example, if customers do not pay invoices on time, you will have issues.  

Another case is that seasonal businesses also have a huge challenge. Most of the cash inflow happens when the season is suitable for business. During the off-season, the cash flow significantly reduces.  

Our article shares some tips and tricks for managing small business finance effectively. Go ahead on reading the article completely to find solutions if you are struggling and also to avoid common pitfalls.  

1. Track the Business Cash Flow

Keep a close watch on any money that comes into or goes out of the business. Ideally, there should be more money coming in than going out. The aim should always be to work towards achieving positive cash flow as there may be future instances of negative cash flow. Aiming for that is the best way to stay on top of bills or unexpected costs.

You may, for example, use a large chunk of available resources for business expenditure. That is acceptable, but it should be something that you have planned for well in advance.  

Consider not taking huge amounts out of the business at once, by applying for loans. We will discuss this a little bit more in detail in the next point.  

If you are not doing the bookkeeping yourself, do take the time to learn the basics as priority. It frees you from total dependence on other people to let you know how the business is performing. 

Take advantage of technologies like accounting software to automate some of the tasks. You will realize greater efficiency and fewer errors in your business books.  

2. Don’t Be Afraid of Small Business Financing

Some entrepreneurs may be afraid to take business loans. Yet, small business financing can provide a solution in different situations. For example, if you need a short-term loan to provide working capital. Small business financing will help you to manage the day-to-day operations when facing a cash-flow shortage.  

Unpaid invoices, as we stated above, can be a challenge. Invoice financing allows you to use such invoices as collateral for financing. The cash can tide you over as you wait for customers to settle their debts.  

Inventory financing will allow you to stock up enough inventory. This works well for seasonal businesses that may face financial shortages come the time they need stocks.  

Be strategic about where you seek small business financing. Traditional lending institutions like banks make it difficult for small businesses to get loans. This is especially true in the case of startups. 

Without proof, if at all the company is making a profit, banks may not consider such businesses creditworthy. Non-traditional or alternative financing options are available. There are many lenders who provide cash for small businesses within a very short time. The application process will be easy and get acknowledged within 24 hours. 

The advantage of the lenders is that you can negotiate for weekly, bi-weekly, or monthly payments. It makes it much easier to keep up with the repayments. Prompt repayments will have a positive impact on your business credit score. It is an excellent indicator to lenders that you are a good investment. 

3. Don’t Mix Personal and Business Finances

Many small-business owners make a common mistake. They do not separate business finances from personal finances.  

The first step, when registering the business should be to open a separate business account. The advantages of doing this are numerous. It becomes easier to track business expenses. There will be no confusion when bookkeeping or filing taxes.  

The business account provides protection in the case of financial liabilities. No one can come after your personal money to settle business debts.  

Further, a business account allows you to build a separate business credit history. If you need to apply for a small business loan at some point, it will work in your favor.  

And finally, it becomes easier to limit your spending on frivolous personal expenses, just because there is money available.  

4. Think About Your Billing Structure

If your business offers credit facilities, you need to be strategic about what you offer clients. Extended payment periods of up to 90 days can place you in a cash bind. Imagine 50 customers holding unpaid invoices for up to 3 months. It will tie up your cash, thus leaving you in a tight financial position.   

Consider shorter payment periods to avoid such problems. Another option is to incentivize those who pay their invoices early, like giving discounts. You can also take the approach of charging interest on overdue invoices. 

Be careful about who you extend credit facilities to. Proper background checks will let you know whether to take the risk or not. It is possible to run credit checks on customers. You can get information on the customers’ financial behavior and payment history. Running credit checks helps you by making it easy to avoid those who can end up being a problem when it comes to settling invoices. 

5. Tighten Your Purse Strings

A lot of money can drain out of the business if you do not keep track of your spending. What you may consider small expenses will pile up over time. For example, it is so easy to swipe your credit card for coffee, snacks, or lunch for the staff. Yes, you win brownie points as a good employer. But, the overall cost will be pretty significant at the end of the day. 

If you handle tangible products, take a walk to your storage room. Are there boxes full of products that have not moved for quite some time? Yeah, then that’s right there is cash that could go into other business areas. Now would be a good time, for example, to launch a campaign to sell search inventory.   

Do not order too much inventory at a time, plan with a wait-and-see attitude. Proper market research will tell you whether customers are likely to buy the item. Inventory financing can provide a solution if you need to stock up on specific items.  

Final Thoughts

Running a business can be tricky, even for those with the knowledge. One of the most challenging areas is managing cash flow. You could find yourself shutting your door if you do not keep a close watch on the business finances. 

We have shared some practical tips that will help you avoid becoming a failed business statistic. Go ahead, implement them and see a positive change in your business.