Many small business entrepreneurs start businesses because they are experts in a specific product or service. Concentrating your efforts on making a great product is vital for success. Still, every individual in business works with the primary objective to make money, and how you manage your finances is just as essential as the quality of your product. Set achievable financial targets and track them to ensure that your business reaches its maximum capacity.
What is the importance of financial management for small businesses?
Maintaining your finances require far more than just plugging numbers into a spreadsheet. If you’re trying to salvage a sinking ship or fuel a developing company’s growth, sound financial management means strategically preparing for your business’s long-term success.
Consequently, to get the most out of your financials, you must be analytical in your financial-management objectives. Setting specific targets, achievable budgets, and attainable metrics around budget maximisation, cash flow, and risk management can help you build a stable financial base.
Accountants in canary wharf are sharing the 3 financial management goals for your small business.
1. Make a budget
Budgeting for your business necessarily involves taking a close look at what has happened last month, three months ago, and this month this year, and then using the data to make informed financial decisions for the coming months and years.
A good budget, for example, would show you how much money you have to spend on recruiting, training, and other needs. It should also provide a summary of your fixed and variable costs, as well as the sales and income needed to finance critical programmes, as well as an indication of projected profits.
Here are some budget-related goals or objectives to get you started:
- Estimate the income
Looking at your previous revenue sources is the very first step in any budgeting activity. To find out how much money you regularly receive from all sources. Don’t forget to factor in any seasonality. For example, for a retail business Christmas and Black Friday period will be busy periods.
- Calculate Variable Costs
Variable expenses are those that fluctuate based on how much you sell your product or service. For example, if you are running a fitness studio, the personal trainer cost will be variable as you will only pay your trainers when they train a client.
- Take note of all fixed costs
Adding up all of the fixed expenses is the second step of making a budget plan. Leasing, equipment, rent, depreciation, finance charges on loans, payroll, taxes, and insurance are all included.
2. Keep an eye on your cash flow
Whether your business is expanding or declining, efficiently controlling cash flow is critical. As they say, Cash is King.
If you’ve drained your working capital, for example, you could find yourself in a cash pinch, unable to pay suppliers or even pay wages. That’s why it’s essential to have a working capital level that helps you keep running your company even though things aren’t going well.
Here are some cash flow-related objectives to get you started:
- Improving cash cycle
The cash cycle is the difference between the average number of days it takes for your customers to pay less the average number of days you pay your suppliers.
- Examine the margins
You will find shortfalls in your company and systematically prune them by evaluating your margins.
- Liquidity and Solvency Management
A good business must maintain an appropriate level of liquidity. What is that appropriate level varies from business to business and industry to industry. However, 6 months of working capital is considered a minimum in many companies.
Companies can improve liquidity in various ways; for example, leasing instead of outright purchases, raising more capital, loans, factoring, discounts on advance payments, and the list goes on.
3. Understand the risks and learn how to deal with them
There’s no question that launching a new company is risky. So, what can you do to manage the risk and increase the odds of success in your favour? How can you, in general, minimise the monetary risks that come with starting a business?
Here are some risk-related goals that’ll help to mitigate specific risks:
- Maintain reliable records
Build a record-keeping system that works right away. When it comes time to pay your bills or file your taxes, getting a reliable filing system and keeping up with paperwork will save you time and money.
- Diversify your earnings
Create multiple revenue streams in your business model, wherever possible. Having all eggs in one basket is hardly a good idea.
As a startup, you should have SMART business objectives- Specific, Measurable, Achievable, Realistic and Timely. Make sure you have yearly, 6 monthly and monthly budgets in place. Never lose sight of the cashflow and lastly, understand bothy systemic and non-systemic business risks and take steps to minimise.