Businesses are constantly being started and closed—it’s a natural cycle. Many fail because of competition, a lack of market demand, pricing, or similar issues. Meanwhile, specific internal issues, such as poor financial management, are another significant reason businesses fail, even when external conditions are favorable. That was the case with Enron (a clear example of how even top performers can stumble and fail), Lehman Brothers, or British Home Stores (BHS).
Managing business finances is critical for maintaining a company with stable long-term growth. Yet, it is easy to get caught up in a daily routine and miss important aspects of this process.
Business Finances: What You Need to Know and Why
Business finances are the backbone of every company. They include raising and managing the funding required for launching, conducting, and expanding a new business.
Financial management expands beyond calculating expenses and income; it includes cash flow assessment, fund allocation, modeling, and strategic planning.
Well-organized business finances allow for data-driven business decisions, minimizing or avoiding potential risks of cash flow shortages and acting on growth opportunities.
Effective financial management ensures compliance with tax laws, reduces or avoids debt, and increases business profitability.
What Is Cashflow and Why Is It So Important for Businesses?
Cash flow is the amount of money entering and going out of a business.
The money entering the business is known as cash inflow, including the money received from selling products and services, investments, or other sources. The money leaving the business is cash outflow, including operational expenses, loan repayments, etc.
Positive cash flow (when the money entered is greater than the money left) is essential for businesses of all sizes. It ensures they have access to capital to sustain their financial operations and meet immediate financial obligations.
What’s more, positive cash flow gives businesses the flexibility to improve their products and services and confidently expand to new markets.
Negative cash flow (when the money left is greater than the money entered), on the other hand, can become a headache for business leaders, leading to financial stress, difficulty paying bills, etc.
Small businesses should perform monthly cash flow tracking. For brand-new businesses, particularly restaurants or other businesses making deals predominately in cash, it is recommended to track cash flow weekly and daily.
Best Practices for Managing Business Finances: Top 8 Tips
Miscontrolled business finances can become the most significant headache for business owners. The latest data from the U.S. Bureau of Labor Statistics (BLS) shows that nearly 1 in 4 businesses in the U.S. fail in the first operational year.
Successful business management can help you overcome the common barriers business owners face in their first operational year.
Here are some handy tips that can be used to manage business finances effectively.
1. Never Mix Personal Finances with Business Banking
Keep your business banking separate from your personal. The U.S. Internal Revenue Service (IRS) strictly requires this for corporations and Limited Liability Companies (LLC). However, this is also beneficial for sole proprietorships.
Using separate business accounts simplifies tax filing, audit preparation, and personal assets protection. Start by creating a bank account with a business-only card, whether debit or credit. If your means of funding is your personal bank account, be careful to track it properly or hire an accountant to help you get things done.
If your business uses combined banking for business and personal affairs, consult an account to resolve the issues.
2. Automate Financial Processes for Efficiency
Automating financial processes involves using artificial intelligence (AI) to streamline different business tasks related to financial management, including tax calculations, employee payments, KPI tracking, and benefits management. One vital aspect to automate is HR and payroll procedures, which can be time-consuming and susceptible to human errors.
Each U.S. state has specific laws regulating HR and payroll practices with strict compliance standards. For example, California imposes strict regulations on wage-and-hour policies, meal and rest breaks, and overtime calculations. These can be complex to navigate manually. By implementing an automated payroll system, businesses can be confident in their compliance with state mandates, as it secures accurate and efficient calculations.
3. Use Loans Strategically
A business loan is a financing method that a company uses when a bank or other financial institution lends money to the business.
Using loans strategically helps businesses arrange the repayment process promptly, using the loan with a clear plan to contribute to business growth.
It is important to ensure the loan’s alignment with the business goals and cash flow capacity so that it doesn’t become a burden for the company. Overall, strategic loan use helps maintain the business’s financial stability by having reserve funds while moving forward for growth.
4. Keep Financial Records Up to Date
Regularly updating financial records helps track cash flows and comply with changing tax regulations. Manually updating financial records can be time-consuming and tedious, so software that manages records can be handy for those who manage business finances personally and those who outsource to bookkeepers.
5. Learn the Basics of Accounting
Understanding the fundamental accounting concepts such as accounting periods, cost concepts, income statements, payroll, and similar provides a solid foundation for effectively managing a business, especially a small one.
Even if your business has in-house accountants or you work with outsourced bookkeepers, a grasp of basic accounting knowledge will help mitigate fraud or other risks and let you collaborate smoothly and more effectively with the financial team.
6. Create a Routine To Keep Up with Financial Management Tasks
Financial management can seem complicated and confusing, but an effectively constructed routine will help to manage financial tasks smoothly.
Creating a routine to keep up with financial tasks can help effectively use business resources, increase market competitiveness, and ensure long-term economic stability.
Here are some common steps to establish a working financial management routine:
- Prepare a clear business and a marketing plan, outlining your agendas for the upcoming years. Include details on the required finances, the means to receive funds, etc. The business plan is the map guiding the financial management processes.
- Monitor business progress regularly to determine the amount of money in the business account and the number of sales against your target numbers.
- Regularly update the customer relationship management (CRM) Ensure timely payments from customers. Late customer payments may cause financial problems for the business. A digital credit management system can be handy for keeping track of customers’ transactions.
- Track day-to-day expenses to ensure you know the basic requirements of your business to survive.
- Monitor stock to ensure the right amount is available. This will help you avoid wasting your financial funds.
7. Plan for and Pay Business Taxes
Paying taxes is the least exciting part of business management. Meanwhile, it is critical to help the business operate by laws and set up long-term business growth.
Tax planning can help you pay taxes, keep the filing deadline, ensure legal obedience, and save finances.
To properly plan for and pay business taxes:
- Asses tax credits, including small business health care tax credit, work opportunity tax credit, disabled access credit, and charitable contribution credit.
- Reassess your tax status. Evaluate your current tax obligations depending on your status, including deductions and credits. For example, if your company operates as a C corporation, reassessment may help to change it to another one that best matches your current business needs.
- Think about retirement plans. Maximizing your tax-deferred inputs helps lower tax liability.
- Make a tax payment in a timely manner with a card, from a bank account online, or by mail.
8. Monitor Business Expenses
Business expenses are the costs triggered while running the business. These expenses may include marketing, brand protection and management, operational costs, office supplies, bank commissions, etc.
Monitoring business expenses is essential to know exactly how things are going and pick the right moment to invest or withdraw cash.
In general, it takes the following simple steps to monitor business expenses:
- Opening a business account exclusive to business operations.
- Choosing an accounting software.
- Merging financial institutions, such as connecting accounting software to bank accounts.
- Filing receipts by labeling and arranging them in categories. IRS requires businesses to save records for no less than three years from the filing date.
- Going over reports and reviewing expenses regularly.
Conclusion
Managing finances can be tricky and complex, especially for newly established companies, making the business a headache.
Understanding the numbers and processes driving the business can help make data-driven decisions, comply with government laws, and stand out in the competitive business market.
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