A massive 82% of small businesses fail due to cash flow issues. If that figure strikes fear in you and keeps you awake at night wondering how to avoid becoming the latest failure statistic, you’re not alone.
Finances are one of the primary sources of concern for any small business owner, and with the economy still improving, it’s not an easy ride for small businesses and larger enterprises alike. This makes having impeccable finances a must rather than a luxury. And for the quarter of small business owners who have no accounting experience (as identified by accountancy firm Accountancy Age), help should be sought sooner rather than later.
But how exactly do you improve your finances, and what measures can you put in place to help you?
Get Expert Help
Having an expert review your finances, identify your current financial position, and put a plan in place for you moving forward can be a huge relief. If accounting isn’t your forte, then getting someone on board who knows what they’re looking at can decipher where you stand and give you a more accurate idea of your current financial situation. Whether you retain services or use them as a one-off, getting expert advice can help you turn around your fortunes and identify areas you need to work on to make the appropriate changes, bringing you a sense of reassurance and peace of mind.
Address Income and Expenses
Understanding how much is coming in and what you’re paying out can be empowering. At a minimum, you need to know these figures to give you a basic idea of your financial situation. Make it your priority to know exactly what you’re paying out every month, when, and what you have coming in, and do this regularly, i.e., every month or week. This understanding puts you in control and gives you a clearer picture of your financial position and what you’re working with, instilling a sense of confidence in your financial management.
Accounting Software
Accounting software is a powerful tool that simplifies financial management. Tools like Sage and QuickBooks can provide a clear picture of your financial health and all of your transactions. Additionally, invoice processing software that easily integrates with your leading accounting software can help you automate your invoices, process them quickly, and ensure timely payments are made. This automation can free up your time to focus on other aspects of your business without neglecting the financials.
Keep Good Credit
Maintaining and improving your business finances can bring reassurance. Good business credit ensures that lines of support and financing are open to you should you require them for further business investment.
To maintain good business credit, you must take steps similar to those on your personal credit record. Avoid taking out excessive loans you can’t afford or do not need; pay off your credit card balances as soon as possible; don’t leave a balance for longer than a few weeks, and maintain a good score by paying your credit balances on time and clearing them as fast as possible.
Avoid taking on excessive debt to make changes, and strive to be as selective as possible when choosing your loans or credit cards so you don’t accumulate bad credit or risk paying back excessive interest on what you borrow.
Don’t Be Afraid Of Business Loans
While on the point of taking out business credit, it’s crucial that you strategically utilise the lines of credit available to you. You can take on loans without damaging your credit score. However, you need to be careful about when you take on loans, what you can realistically afford to pay back, and what you use it for. This strategic approach to loans will make you feel cautious and thoughtful, ensuring you make the right financial decisions for your business.
Loans can help pay for new equipment in the event of emergency breakdowns, facilitate growth, pay employees in the face of financial shortcomings, etc. However, they should never be taken out just to boost the bank balance for no reason, and you need to be careful about the type of loan you take out to ensure you can afford the repayments.
By maintaining good business credit, you can have a greater chance of obtaining the credit you need when you need it, so you won’t plunge further into the red and make your situation worse than usual.
Improve Your Billing Strategy
How you approach your finances in terms of billing can be a huge factor in your financial health both ways. If you don’t chase up your invoices, are sloppy when sending them out, and generally don’t prioritise your billing, then chances are you won’t have a regular income or be collecting essential payments on time. This will impact your own ability to pay invoices and have the funds available for the general day-to-day running of your business. It can also lead to strained client relationships and potential loss of business.
Having too much cash tied up in unpaid invoices isn’t a great idea; you don’t need to be a financier to know this. Your billing strategy, therefore, needs to be on point and a priority for you to ensure continuous good cash flow.
This means you need to issue invoices as soon as the work is completed; using invoice processing software, as discussed above, can help you ensure that invoices are issued immediately. You also need to have a policy in place for sending out reminders for payment due to remind clients to pay their invoices and tackle overdue invoices.
It might be that you attach fees to late payments, which needs to be in your T&Cs upfront and clear for the client that it is applicable so they know what to expect and enable you to enforce this. You can also offer discounts for payments made fast, for example, 5% if paid within 7 days. Find a strategy that works for you and encourages your clients, especially those chronic late payers, to pay on time.
Use A Bookkeeper
While setting time aside to monitor the books each month is always a good idea, it isn’t always possible. If you don’t know what you need to be looking for or how to interpret the data, it won’t make much difference at all. This is where a bookkeeper can be invaluable. A bookkeeper can help you keep your financial records in order, ensure all transactions are accurately recorded, and provide you with regular financial reports that you can use to make informed business decisions.
While you need to know where you are in terms of your finances, doing it yourself might not always be viable. In this instance, working with a bookkeeper can be a great way to help you understand the figures and get a good idea of what is going on each month.
Have your spending checked each month, and get your bookkeeper to reconcile accounts and give you an overview of what’s going on. Neglecting to do this can lead to chronic overspending or put you at risk of embezzlement if people know no one is monitoring finances.
Reinvesting and Emergency Funds
To really improve your finances and capabilities, you need to set aside money to reinvest in the company and build an emergency fund.
Reinvesting means you are putting your profit back into the company or essential aspects such as upgrading new equipment, training employees, putting expansion plans in place, improving marketing, or anything else that benefits the company and allows you to improve what you do. Without reinvestment, your company will likely be stagnant, which will also impact your ability to make money. While you still want to turn a profit, you need to use this profit to make the company the best it can be by reinvesting.
Emergency funds are another way you can reinvest in the company. A good rule of thumb is to have around 6 months of operating costs to help you stay afloat in the face of financial hardship and adversity. If you have a fund to rely on to help you through hard times, you can plan ahead for issues and be prepared for any eventualities while being given a buffer to get things back on an even keel.
This is where the above points can be helpful, as the more you know about what you have coming in and going out, the easier it will be to put a portion of your income aside for an emergency fund and know exactly what you need and what six months of expenses look like.
As a small business, your finances need to be in good shape to help you navigate the intricacies of keeping your business afloat and do what you need to do to the best of your abilities.
Understanding what your regular income is and when money needs to come in and go out each month can be the start of improving your financial health and avoiding running into issues down the line. The tips in this post are designed to help you on the road to better financial health and can be implemented together or alone to get to where you need to be.
