To be successful in business, you need to come armed with how to manage your finances.
Managing finances can be a challenge for any small business owner. If you don’t have a lot of experience managing business finances, it can feel like a chore, and you could be slipping into bad financial habits that could one day harm your business.
What is financial management for Entrepreneur?
Money management is the process of handling your business’s finances through budgeting, setting goals, tracking expenses and income, and investing.
With a sound money management plan, you can avoid periods of negative cash flow and ensure your business is on track to turn a profit.
Failing to manage money wisely can lead to problems like making late payments, running out of money, and not collecting your accounts receivable.
Tips for Managing Finance as an Entrepreneur
To keep business operations running smoothly, you need enough money to cover expenses. Here are some of our best tips for financial management as an entrepreneur. Put these tips to use to learn how to manage your finance as an entrepreneur effectively.
Set Your Goals
The first step towards successful finance management is setting clear goals. It is crucial for the survival and growth of your business.
One obvious goal for every business is to generate higher revenues. But you should set more specific goals that define your priorities. For instance, some important goals are “decrease costs,” “improve margins,” “reduce debt,” and “budget cash flow.” While your primary goal is always to make more money, there’s more to it than just increasing sales. You can also boost revenue by paying attention to your loans, if any. Check to see how much money you can save by lowering your production expenses and overhead and creating a cash flow budget.
2. Stay on top of deadlines
If you don’t know when your bills are due, such as accounts payable, business loan payments, or credit card payments, you might not have enough cash on hand. Not to mention, failing to know when bills are due can set you back with late fees or added interest, lower your business credit, and sour lender and vendor relationships.
To avoid missed bill payments, stay on top of your deadlines. Record when payments are due and set reminders, so you don’t fall behind. Pencil in due dates on a paper, phone, or computer calendar and get on a consistent payment schedule.
3. Plan your Budget
The most important part of any financial plan is a budget. But how do you budget when you have no clue what’s going to come in? One of the easiest places to start is to minimize your personal expenses as much as you can. A budget shouldn’t be considered a plan for where to spend every dollar, but rather the framework to help you make rational
Create categories that include housing costs, transportation, groceries, memberships, and entertainment, and then develop ways to reduce costs in each category as much as possible. Once you’ve done that, figure out how much you’ll need to make to cover those costs and still have money left over to save or invest back into your business; this should be your goal for profitability.
Many business owners have multiple accounts, such as a checking account, savings account, and credit card account. Ensure you know how much you withdraw or spend from each account to stay on top of account balances.
It’s easy to use your business credit card, debit card, or checks to cover small expenses. A little lunch for the staff here, a new coffee machine for the break room there… But small expenses add up. If you don’t keep an eye on your spending, you could be fitted with a sizeable bill that you aren’t prepared for.
Always know what’s coming in versus what’s going out. Make sure your essential overheads are covered or that they can be covered by an emergency fund if there’s a revenue dip.
4. Maintain an Emergency Fund
The best thing about being an entrepreneur is that your income potential is limitless. However, achieving your financial goals is not easy, especially in the first few months or years of running your business. There will be weeks when business is great but also weeks or months when business is slow. In times like this, you want to make sure you have a backup fund to keep up with your expenses.
An emergency fund can help you get yourself out of a tough situation. Once you’ve figured out how much money you’ll need to cover your business and personal expenses for one month, multiply that by six, and make sure you always have that much in your emergency fund.
Much like a personal emergency fund, your business emergency fund should be enough to cover three months to a year’s worth of expenses. Note that every company’s financial needs are different.
5. Separate business and personal funds
Do you have a separate bank account for business? Even if you aren’t required to separate business and personal funds, doing so is critical to money management. Plus, business bank statements are useful for tracking profitability, reconciling your books, and monitoring spending.
Your personal and business money should be kept separate at all times. This will eliminate situations of potential money crunch in business because of withdrawals for personal expenditures.
When you combine funds, tracking withdrawn and deposited business funds become difficult, making it challenging to monitor incoming and outgoing money.
If your business and personal funds are in one account, you might be prone to dip into your business funds for personal expenses or vice versa.
When you start a business, make sure you open a separate bank account for the company. And if your business is your main source of income, consider paying yourself a salary to cover your personal expenses.
6. Manage inventory
Do you order too much inventory, only to have it collect dust in your storage room? Or, are you constantly running out of goods that are in demand, causing you to turn away customers? Improving the way you manage inventory can help you manage money in your small business.
Track how much inventory you have in your business to avoid crossing the fine line between having too much inventory and not having enough. Record inventory purchases and sales in your books and spend time monitoring how much you have on hand before ordering more.
There’s nothing that feels as good as knowing you’ve made a client happy with your services when they pay for the services on time.
When you’re running your own business, client payments are your lifeline. If your invoices don’t get paid, your bills don’t get paid, and if your bills don’t get paid, your business can’t run. One of the most important things you can do is have a clear and defined payment policy in place. Your clients should know what payments are due, when they’re due, how they can be paid, and what happens if payments are late or missed.
You can’t force anyone to make a payment, but what you can do is:
- Send invoices as soon as you can
- Set payment timelines that ensure payments aren’t forgotten
- Follow up on sent invoices or late payments
8. Get the right funding
You must choose the right type of finance for your business – each type of finance is designed to meet different needs. Smaller businesses usually rely more on business overdrafts and personal funding, but this might not be the best kind of funding for your company.
9. Tackle problems when they arise
It is always very stressful facing financial problems as a business. Still, there is help and advice available to help you tackle them before it gets too much to handle, so seek professional advice as soon as possible. You can also take some initial steps to minimize the impact, such as tackling priority debts first and assessing how you can improve your cash flow management.
The importance of managing your finances as an Entrepreneur
The most important step for any business owner is to educate themselves. By understanding the basic skills needed to run a small business – like doing simple accounting tasks, applying for a loan, or drafting financial statements – business owners can create a stable financial future and avoid failure. In addition to education, staying organized is a major component of sound money management.
Seek Help from an Accounting Professional
Although finances are a necessary part of running a business, managing them isn’t always a strong point for business owners. If accounting, bookkeeping, and managing finances are not your cup of tea, then you should get help from an accounting professional. Instead of procrastinating or spending too much time worrying over it, you can hire an expert to do the job.
You Can Do It!
Being an entrepreneur is exciting and overwhelming at the same time. The best thing is that you have the opportunity to grow your money. The challenging part is you can lose your money if you don’t manage it properly.
Remember, equipping yourself with financial management skills is essential for business success. There are many ways to keep your finances on track. It all starts with establishing clear goals. Next, properly track and record your expenses. Keep them separated from your personal expenses, maintain a good credit score, save, put up an emergency fund, and stay informed. All these best practices should help you build your wealth and achieve business success.