It’s quite amazing that seven years on from the financial crisis, access to credit is tough for small businesses. It tells you that we’re probably not out of the woods yet and that there is likely to be more hardship to come.
Small businesses need to do all they can to prepare for tomorrow’s risks today. And that means seriously looking at whether your finances are as good as they could be. Having a sound financial plan for your business is essential to your long-term success and ability to manage risks.
However, many small businesses aren’t run by teams of trained accountants. They’re run by ordinary people looking to make a buck from their skills and expertise. That means that small businesses often don’t manage their finances in the best way possible. Here are some tips to make sure that your business is keeping its financial house in order.
Keep An Eye On Accounts Receivable
As a small business owner you probably have some basic knowledge of accounting. Your accounts receivable is essentially all the income that you are owed for jobs that you’ve already done. But more often than not, this number can start to get out of control. Payment orders can stack up, making your accounts look good. But unless you’ve actually received the money, it’s no good.
One of the problems that businesses can have is an increasing gap between the time they invoice and the time they get paid. It’s important to make sure that this gap doesn’t grow over time. If it is growing, there is probably something that needs your attention.
One possible solution is to send clients invoice reminders a day or so before the due date of their invoice. Another is to think about how your invoices are presented. Check that you’re doing all you can to make your invoices appear as professional and as urgent as big businesses.
Choose Suitable Finance
Each business is different. And therefore, each business requires credit for different purposes. Often, creditors will be specialized in particular areas. Logistics or delivery businesses can apply for specific new truck finance. Farms can apply for machinery finance. And even construction companies can get loans for individual pieces of equipment.
These specialized creditors tend to offer a better service than generic lenders. They actually understand how businesses in your sector operate. And that means that they will be much better placed to offer you a loan based on your actual risk.
Expand Staff Slowly
If you’re running a business that is growing rapidly then congratulations. But growing a business successfully is not something that is easy to do and costs can quickly spiral out of control.
The primary source of increasing costs is staff. The cost of staff is not just in wages. It’s also in the company resources they’ll need to do the job. Plus, if your business has more than 50 employees, you’ll have to start paying medical expenses.
If you’re a business that uses a lot of machinery, you may find that new equipment actually costs more than the worker you’re hiring.
The trick is to slow down your expansion of staff without saying no to people who want your business. One way to do this is through outsourcing various tasks to other companies. Perhaps you could pay for somebody else to take care of your IT, freeing up labor in your business. Another way around the problem of taking on staff is to take on freelancers. Find tasks within the company that can easily be performed remotely by a freelancer. This includes things like updating the website or managing timetables.
Keep Your Business And Personal Accounts Separate
Many small business owners are tempted to carry out business transactions on their personal accounts. But this is generally a bad idea.
For one, it makes you less efficient. Having to trawl through months of statements to find out which transactions are business and which are personal wastes time. But it also makes accounting a nightmare. If you do happen to have an accountant, it will increase your bookkeeping costs.
A much better strategy is to enforce a policy of strict separation of your business and personal accounts. This makes accounting easier and gives you a clearer picture of the financial health of the business.
Run A Lean Business
Many small business owners are tempted to splash out once the money starts rolling in. They want the high-end IT equipment. They want the flashy offices and they want company cars. In other words, they want to carry on like they own a mini Fortune 500 company.
But many small businesses tend to forget two simple facts. First, the money is probably better spent reinvesting in the firm. And second, the good times won’t last forever.
The second point is of particular importance. Orders to small businesses are notoriously volatile. There can be weeks when you’re running flat out. And there can be weeks where practically nothing happens.
Create A Financial Plan
Almost everybody who starts a small business wonders why they need a financial plan. But a financial plan is essential for keeping track of where you are right now and where you want to go.
Don’t just assume that your gut feeling is enough to guide you through to success. Many business owners don’t take stock of exactly where they are regarding their finances until the end of the year. And it’s only then that they realise how far they’ve veered off course.
But more importantly, a financial plan allows you to calculate when you’ll be able to pay for significant expenditures. If you know that you have to replace equipment every ten years or so, planning allows you to set aside the money you’ll need.
Managing your finances is important. But it’s also something that takes a lot of time to get right. Most small businesses will make mistakes along the way. But the important thing is to stick with it and learn as much as you can. After a couple of years, following the advice above will feel like second nature.