The financial management side of running a business is often the most intimidating part of entrepreneurship. Many small business owners open their businesses despite having any kind of a background in financial accounting. The lack of knowledge related to business finances can make money management a difficult task. Here are seven important facts about money that every small business owner needs to know in order to run a successful business.
- Cash Is Often Too Easy To Spend
The cash that is readily available in a business bank account will nearly always be spent with the goal of growing the business. The key to long-term business success is to spend the money you have wisely. It is also imperative that you track every single expenditure made by your business to make sure you understand exactly what the money was spent on and the ROI of each investment. Make sure you review all of your financial statements regularly. Pull reports, such as a balance sheet, cash flow statement, etc., using QuickBooks at least once a month and spend time reviewing them with a trusted advisor.
- Monitoring Cash Flow Is Key
Monitoring the cash flow of your business is what is ultimately most important when trying to build a financially strong company. Take a close look at your statements each month. Analyze your inventory, receivables, payroll, etc. Is your business spending more cash then you take in? The most successful businesses take the time to build their cash balances.
- Stick With A Budget
Creating an accurate business budget and sticking with it is another key to achieving long-term business success. Use both expected results and previous performance as factors when setting your annual expense and revenue budgets. Then make sure you keep track of your progress and make updates to your budget no more than twice a year. You will also want to keep track of any changes that occur in the market conditions that could affect your budget.
- Debt Isn’t Always The Enemy
Another of the seven important facts about money is that business debt isn’t always a bad thing. The key is to use debt as a tool to help cover operational losses for a short period of time. Take a closer look at any debt your business has and classify it as either long or short-term debt. If your business is carrying too much debt, start by paying off the debts that have a low-rate of return on the initial investment or those with short-term repayment windows.
- Both Your Personal and Business Credit Scores Are Important
Creditors will not only take a look at your business credit score when evaluating your business for a loan. They will also analyze your personal credit score. The higher your credit score, the lower interest rate you will receive and the more likely you will be to receive satisfactory terms on your loan. Pull your own credit score as well as your business credit score at least twice a year to check for mistakes and seek professional guidance if your score is on the lower end.
- Don’t Forget To Plan For Retirement
The dream of many small business owners is that their business will take off and be so successful that some day the sale of their company will fund their retirement. Unfortunately this dream doesn’t always pan out. Start investing in your future retirement now by establishing a 401K in association with your business. Then make it a priority to make the maximum contribution each year. That will help you set yourself up for the future while also lowering your yearly tax obligation now.
- Establish An Emergency Fund
The last of the seven important facts about money is that you need to establish an emergency fund no matter how well your business is doing. Just as you need to save for a rainy day at home, you also need to protect your business when the market fluctuates. No matter what industry you operate in, all businesses operate in cycles. Sometimes business is great, while other times your sales will be down. In general it is wise to save enough to cover at least 35 percent of your fixed operating expenses for a minimum of three months.