6 small business finance basics you must understand

Some business owners feel that they are not good with numbers, so they tend to shy away from learning even the business finance basics. However, you should understand your business finances in order to avoid trapping yourself in a vicious circle. 

The less attention you focus on crunching numbers, the less you will know about what’s going on with your money. That makes the risk of losing control of your business finances uncomfortably high. So, to stay in business, learn the finance basics. 

Keep the budgets separated

Learn the difference between your work budget and your personal budget and stick to it. It’s tempting and easy to reach into your business funds when a personal emergency happens, but try not to do it. 

In a way, this is as if you’re borrowing money from yourself, but it comes with a catch – when it comes to paying back, we tend to be more relaxed towards ourselves than to others. 

The same is true the other way around – just as it is unethical to dip into business savings for personal mortgage payments, it is wrong to use private funds to supplement a business.

If life and work are financially distinct, owners can better track business-related profits and expenses and estimate their financial health.

Keep costs low 

Studies show that it might take, on average, five years for a privately owned enterprise to become profitable. To stay afloat before this happens, you should use every available opportunity to cut down on your costs, 

Avoid long-term contracts. Shop around and look for the best prices. Find free tools and software that work as well as their expensive brand name counterparts. Perhaps you can even trade your services for the goods you need instead of spending cash? 

Find a way to save money, but don’t be stingy or cheap as that is going to cost you more in the long run. 

Get to know your funding options 

6 small business finance basics you must understand

Getting an enterprise started, and keeping it going strong are two separate things. Even the most successful business needs some extra cash from time to time, to invest in a new project or equipment to stay ahead of the curve. That is why you need to know what funding options are at your disposal. 

  • Merchant cash advances are best for fast and certain growth, as their interest rates tend to be very high. Avoid them if you have a long term, slow but steady return project planned. 
  • Business lines of credit are a useful funding tool that every business should have, much like business credit cards. They can also be used to resolve cash flow issues.
  • Invoice factoring. Selling unpaid invoices to a third-party company is yet another efficient cash flow improvement method.
  • Microloans. This is the name for loans that are generally less than $50,000. Because they are small, they are easier to pay off. Many nonprofits give them to struggling or aspiring businesses with reasonable terms.

Stay on top of your bookkeeping records 

As it was stated in the introductory paragraph, a successful business owner is the one who knows where their money is coming from, where it is going, and what is doing there. 

Monitor your finances in every possible way. Financial statements can help you to understand better how your enterprise is performing and notice the weak spots. Plus, keeping all records up to date will make your year-end tax prep much less complicated. 

Keep an eye on the gross profit margin, the net profit, the net profit margin, accounts receivables, and current assets to liabilities. If this sentence sounds too scary to you, consider hiring an assistant who would help you stay on top of your finances. 

One must choose an invoice template wisely and keep track of their finances in a way that is easy to understand. You don’t necessarily have to be a finance expert to track your business finances efficiently. All you have to do is follow the basics, and you will be able to increase your ROI dramatically.   

Maintain records of all inventory

Being aware of your inventory will help you keep track of current trends and prepare for the upcoming year. You should also pay attention to dates purchased, stock numbers, purchase prices, dates sold, and sale prices to help you with this. They are all relevant information for inventory records. 

Keeping an updated inventory can also prevent stealing and misplacing of merchandise and keep inventory holdings to a minimum. Remember, additional stock in holding is merely cash tied up for your business.

Pay attention to debts and credits

6 small business finance basics you must understand

Be sure to stay on top of what customers owe you and keep the healthy cash flow going when the payment is due. It is just as important to keep track of debt you owe others. 

You should record as much data as possible, including invoice dates, numbers, amounts, terms, dates, and amounts paid or due, balances, and client information. If you owe someone money, deal with it sooner rather than later and establish a reputation as someone who always pays their debts on time. 

 

Michael has been working in marketing for almost a decade and has worked with a huge range of clients, which has made him knowledgeable on many different subjects. He has recently rediscovered a passion for writing and hopes to make it a daily habit. You can read more of Michael’s work at Qeedle.