5 Financial Management Tips for Small Businesses
Limited financial resources often make it difficult for small businesses to meet immediate expenses, which can negatively affect their chances to invest in growing their enterprise. Moreover, some small business owners may not have the financial expertise to make sound financial decisions for their companies.
However, a small business cannot survive in a cash-strapped situation. Effective money management is required to ensure the sustainability and success of a small business.
Effectively allocating and utilizing resources can enable businesses to cover operational expenses and meet financial obligations. If you are a small business owner, follow the financial management tips below to navigate economic uncertainties and seize growth opportunities.
1. Seek financial education and stay informed
Small business owners need the right financial expertise to manage their financial matters. For this purpose, they have two options.
- Hire someone with the right education, such as an MBA in accounting, to manage their finances.
- Enhance their own understanding of financial rules and principles and manage their finances themselves.
The first option is pretty straightforward. The second option is a bit trickier; it requires you to improve your education. Formal education can help. If you want to enhance your financial literacy, learn about bookkeeping, etc., you can enroll in an online MBA accounting degree. The benefit of an online degree is that it helps you manage your business while studying by listening to recorded online lectures whenever you have time.
Other ways to enhance financial management understanding
- Attend webinars and conferences on financial management.
- Join industry-specific associations or networking groups that offer educational resources and support.
- Stay informed about new tax laws and other financial standards and regulations.
- Review updates from government agencies regularly to ensure compliance.
- Read financial journals, columns, and blogs to stay ahead of market trends.
- Follow reputable financial experts on social media, regularly read their views, and participate in discussions.
- Explore financial management tools to simplify the money management process.
- Use online resources and calculators to analyze profitability ratios and breakeven points.
2. Pay yourself for your efforts
It is tempting to not pay yourself and put your earnings into your business. The thought behind this is to spur the growth of your business by adding additional capital.
However, reinvesting everything back into the business gives you an unrealistic idea of your profits; more specifically, it gives you a “profit illusion.” It makes you think your company has higher profits than it actually does, which in fact, is because the expenses are not being recognized or accounted for.
Here is what you should do to realistically manage your finances while paying yourself.
- Pay yourself a reasonable salary: Set a salary that meets the market standards. While doing that, consider your business’s financial health.
- Ensure proper bookkeeping: Make separate accounts for personal and business expenses and ensure proper bookkeeping.
- Ensure adequate cash flows: Strike a balance between paying yourself fairly and ensuring sufficient cash flows for your business.
- Consider your goals: When determining your salary, consider your business’s long-term and short-term goals.
3. Prioritize profitability over revenue
Revenue shows how much you have earned through your business, but profitability also considers the expenses incurred during that process.
Benefits of prioritizing profits over revenue
- By prioritizing profitability, you optimize your business operations, improve efficiency, and reduce costs. All this ensures that your revenues translate into higher profits.
- Focusing more on profitability ensures financial sustainability and stable business growth.
- It encourages you to make data-driven, informed decisions.
How to improve profitability?
There are countless ways to increase your focus on profitability and ensure upward growth. Below are some of them.
Focus on financial margins
- Analyze each product or service’s profitability.
- Identify offerings with high margins and consider allocating more resources and attention to them.
- Discontinue the low-margin offerings or employ strategies to improve their profitability.
Control costs and ensure efficiency
- Review your business operations and identify areas where you can improve efficiency.
- Connect with suppliers to negotiate better deals.
- Opt for bulk purchasing in return for discount offers.
- Reduce waste by streamlining operations.
- Conduct market research to know your customer’s willingness to pay.
- Price your products optimally to maximize profits while staying competitive.
- To justify higher prices, propose value-added services or premium offerings.
Customize your product offerings
- Identify the most profitable customer segments and tailor your products towards them.
- Develop targeted marketing efforts and campaigns to serve your most valuable customers.
4. Don’t shy away from taking loans
Most business owners don’t prefer taking loans due to fear of payment failures. However, without injecting sufficient capital, your business may not survive. You might face challenges buying equipment or raw material to sustain your business operations.
Apart from enhancing your ability to pay for purchases, loans offer a range of other benefits.
- Ensure growth: Loans provide the capital to ensure the growth of your small business. Whether launching a new product line, starting a new shop, or investing in a new asset, you need loans for expansion.
- Bridge gap between receivables and payables: Loans ensure a continuous and consistent cash flow by bridging the gap between receivables and payables.
- Seize opportunities: With enough money, you can seize sensitive opportunities, such as purchasing inventory at a discounted price or investing in real estate.
- Diversify: Loans also help you diversify your product and service offerings by venturing into new revenue streams. This way, they reduce your reliance on a single income source.
- Flexibility: Seeking loans from a financial institution allows you to choose various options suitable for small businesses. You can opt for term loans, lines of credit, or equipment financing.
5. Purchase at the right time
When it comes to financial management, the time of purchase makes a huge difference.
Here is what you should do to manage your purchases.
- Don’t spend unnecessarily until you have settled your bills.
- Exercise patience and make new purchases when you have sufficient funds in reserve.
- Time your purchases strategically so that you can reduce tax obligations.
- Acquire tax-deductible items, such as supplies, when the year draws to a close. It helps you include them in your tax return, potentially decreasing your overall tax liability.
Managing the finances of a small business needs prudence to ensure growth and sustainability. With the tips in this article, you can make wise decisions to manage intricate business finances, overcome challenges, seize opportunities, and make your enterprise resilient.