Running a business requires the owner to wear many hats. While multitasking and prioritizing things within the company are essential, financial management should always be at the forefront of one’s mind. After all, it doesn’t matter how in-demand or innovative the business is, it needs a strong financial foundation to continue.
Many small business owners and entrepreneurs struggle with financial management or get overwhelmed with the daily grind. Here are some practical financial management strategies for business owners to take on, one step at a time.
Create Separation Between Personal and Business Accounts
One of the most important things you can do for your business and personal life is to create separation between your accounts. Creating clear, dividing lines will save time and money in the long run. It will also help prevent undue stress should a precarious situation occur.
Many small business owners don’t create financial separation out of convenience. However, this often leads to thousands of dollars in extra taxes following an audit. If you can’t validate that all purchases were, in fact, business-related, the IRS will come after that money. They’ll also take a closer look at deposits in your personal accounts and tax you if you can’t prove that they were unrelated to your business.
In summary, a lack of separation is a recipe for disaster, though there are benefits to seeking personal financing through professional channels. For example, you can find specialized Home Loans for Doctors & Dentists. Otherwise, taking out a separate card and managing two sets of books may seem arduous, but it’s worth it.
Look for Creative Financing Options
Think outside the bank when financing your business. Before you apply for a business loan, consider other options available. Depending on your industry, you may be eligible for local grants. Crowdsourcing is often a great option for product-based businesses. Additionally, if you own machinery or equipment you can consider a sale-leaseback equipment loan. This is an excellent way to infuse your business with capital leaving the line of credit open for different needs and preserving the cash position.
Many modern business owners are embracing the idea of bootstrapping— independently raising money for business initiatives rather than relying on investors and banks. While it takes longer to attain a financial goal with this method, it offers the benefits of manageable scaling and continued control of the business.
Consider a Profit First Strategy
Mike Michalowicz Profit First has revolutionized how many small business owners handle their finances. With this approach to financial management, business owners take profit before paying expenses, flipping the traditional financial equation. The goal is to make profit a habit rather than treating it as a result.
Michalowicz suggests starting by creating separation among your accounts. Your accounts should include:
- Income (checking)
- Profit (savings)
- Owner Pay (checking)
- Operating Expenses (checking)
- Tax (savings)
All proceeds from your business should funnel in through the income account, then be distributed among the other four accounts based on your percentage breakdown.
The goal of the Profit First method is to create a contingency account for emergencies while developing a better understanding of cash flow. It also helps shift the entrepreneurial mindset to maintain better control over business expenses.
While it’s worth it to read the book, you can also find many summaries and simplified guides online.
Set Intentional Financial Goals
Business owners typically have a general idea of their annual financial goals: improve profits. Successful business owners set intentional financial goals which address specific areas of the business; for example, creating an emergency savings fund or cutting expenses by 10%.
The specificity is just the first step in setting an intentional goal. From there, you need to reverse engineer the goal and create an action plan. What steps will you take every day to contribute to that goal? How will you check in each week to determine your consistency? What benchmarks will you use each month to measure your progress?
Having something clear to work toward will help keep your business finances at the forefront of your mind.
Monitor Personal and Business Credit Scores
Many business owners don’t think about their credit score until they need financing. As a result, they fail to secure financing because they weren’t aware of any issues with their credit score.
Take the time at least once per quarter to review both your personal and business credit scores. Your score is influenced by several factors, including:
- Payments that have gone to collections
- Late or missed minimum payments
- Debt ratio
- Hard inquiries (i.e., lenders running a credit report)
Negative items stay on your credit report until they reach the statute of limitations for removal.
Another issue with business credit is when it doesn’t exist. It’s not a bad credit score; there’s just insufficient credit history. You can build a business credit history by taking a small loan and paying it back. In some scenarios, having no credit history is worse than having poor credit.
Continuously Track and Adjust Expenses
If you don’t take the Profit First approach, which prioritizes proactive expense management, consider setting a weekly review time for expenses. Be vigilant in tracking them and adjusting spending to avoid big surprises at the end of the month.
It’s also important to get ahead of subscription services and recurring payments. Ensure that money is set aside ahead of time rather than relying on debt.
Know When Saving Costs You More
There’s a big difference between frugality and cheapness. As a business owner, it’s important to be frugal when managing your enterprise. It’s equally important not to be cheap.
Take the time to understand when it’s better to spend more and invest in quality and when you can do without. For example, you might determine that using the free version of a social media scheduling app is costing you more in time and disruption. The opportunity cost of upgrading to a paid version could be worth the investment.
When investing in your business, start small and scale-up. Invest in quality and value when necessary.
Create a Retirement Plan
Many entrepreneurs fail to plan for retirement. It can be difficult to envision what that might look like as a business owner. However, it’s important to consider the options and develop an exit strategy and contingency plans for your future.
It’s also integral to create a retirement savings plan that will become your nest egg for the future. While you won’t get the same options and benefits as an employee of someone else’s business, there are endless resources to help set you up for success.
Get an Expert Opinion
Finally, don’t hesitate to reach out for an expert opinion. Schedule some time with a financial advisor who specializes in entrepreneurship. This expert can help you identify pain points in your business, set intentional goals, and help you create a plan for long-term success.
With these financial management strategies, you can set your business up for success now and in the future.
