Financial Management Tips That Every Business Owner Should Know
Financial management is an important part of running a business. It’s not just about balancing the books and making sure you’re not spending more than you’re bringing in. It also requires understanding how to spend your money wisely, so that it can be used for future growth rather than wasted on non-essential items. This article will provide some tips to help you with financial management for your business.
Track expenses and set targets
It’s important to know how much you’re spending, both on capital expenditures and operating costs (i.e., rent, pay, and utilities). That’s where using technology can come in handy and help you keep track of finances. Having a pay stub maker tool can prove invaluable when keeping track of your business finances as this tool helps with balancing the books and making sure spending stays within limits. Another benefit is that it keeps records of information, so there are no discrepancies about what is being spent. Sometimes technology can be costly, but it can also be cheaper to use than hiring an additional accountant or having staff track the information manually.
The best way to track expenses is by setting targets that will help you determine the proper amount of reinvestment into your business and how much should be kept as cash flow. For example, if you plan on reinvesting 20% of your revenue back into the business every month so that it can grow over time, this would likely require an increase in operating costs such as rent. If you only have $500 left in cash flow after paying these costs, you may need to lower your target for reinvestment to 10%. This will allow the business to grow while still taking care of expenses and maintaining a small portion of the cash.
Understand the difference between cash flow and profit
It’s very important to understand the difference between what your business makes as a profit and how much money you actually have available to spend as cash flow. Profit is calculated by taking your revenue minus all your expenses, including those that were paid for with cash rather than charged on credit or debit cards. Cash flow is essentially the amount of actual spending money that you have leftover after paying taxes and reinvesting into other parts of your business. For example, if someone pays $100 in taxes, we’ll say $80 goes towards other things within the business and $20 becomes actual cash flow. The best start-up businesses take advantage of low initial prices for their products or services but make lots of reinvestments back into their businesses in order to produce a greater overall profit and cash flow. Understanding this difference will help you make better decisions about your spending.
Spend money wisely
It’s also important to understand the differences between different kinds of expenses when it comes to your business. Capital expenses are one-time costs that are paid for with cash, but they are expected to be used over an extended period of time, often five years or more. For example, if you purchase a new computer for your office at the cost of $2000, that is considered a capital expense because it should last for multiple years before needing replacement or major overhauls. On the other hand, there are operating expenses that must be paid on an ongoing basis. These are smaller expenses that are paid out regularly, such as rent or phone bills. It’s often beneficial to keep these costs low because it can reduce your monthly spending, but you should still make sure that the total amount is reasonable for what you’re getting (i.e., if you’re paying $500/month for an office space that would be considered very high end in most areas).
Set up a specific savings account
Having some kind of savings account will help your business stay afloat during lean months when your cash flow dips below-average amounts due to seasonal changes, other economic factors, etc. Setting up a separate savings account and making regular deposits into it ensures there will always be extra available for emergencies without reducing funds available for other things. You can move money from this account to your business checking as needed, but it will be reserved in case there is a sudden need for more cash flow than usual.
Have a plan for growth
Having a written business plan is always beneficial, but it’s even more important if you’re going to start investing some of your capital into expansions or new equipment that will be used immediately. Since there are no guarantees that this increased spending will translate into increased revenue right away, it’s important that you have a contingency plan in case something goes wrong. For example, if you think investing $5,000 over the course of six months will help increase the amount of revenue generated for your business and you find that six months later, it hasn’t worked out as expected, you should have some idea of what to do with this money in that situation. One option would be to reduce the amount you’re reinvesting into the company and use the remainder of the money saved to help pay down any high-interest debt (e.g., credit cards) on the part of the business.
The financial management tips that you have just read are great for business owners to know. Now that you’re aware of the different kinds of expenses, how to save your company money, and what a plan should entail in case things don’t go as planned, head out there and make it happen! You can do this by making sure your customers stay loyal with quality service or by offering them incentives like discounts on their next purchase if they sign up for an email list (or both.)
