Financial Management Tips for Small Businesses
When it comes to your small business, every decision you make has a financial effect. Making the right financial decisions at the right time is critical to your success. Here are some tips on the fundamentals of small business finance.
Understand What’s Happening
You don’t have to have a degree in accounting to run a successful company, but it’s critical to be able to effectively read and interpret basic financial statements. The Profit and Loss (P&L) Statement summarizes your revenues and expenses during a specific period of time. The profit or loss shown on the P&L Statement is your “bottom line.” The Cash Flow Statement gives you information about cash coming into your business from ongoing operations and investments, and cash leaving your business for expenses and investments. The Balance Sheet is a snapshot of your assets (cash, inventory, property), liabilities (accounts payable, long-term debt), and equity (amount invested by you and other investors). Understanding these documents helps you make good decisions and be well prepared when you need to meet with lenders about loans.
Effective small business finance practices include handling profits wisely. Sometimes you need to take profits and reinvest them into the company. For example, you might spend more money on a particular marketing strategy that’s been particularly effective or buy a new piece of equipment that will enhance productivity. Other times, you’ll be able to set the money aside for the future. When that’s the case, don’t let the cash just sit around in a low-interest checking account. Learn about investments, and consult a trusted professional to help you invest profits for yourself and your business.
Working with lenders to get loans for isn’t something you’ll do just once when you need start-up capital. As your business grows, you will develop new goals. Achieving those goals will require additional capital. Develop and maintain a basic loan proposal so that, when the time comes, you’ll be armed with all the information lenders need to review when they’re considering giving you a loan.
You’re an expert when it comes to the product or service that your company sells, but probably not when it comes to small business finance. That’s okay! When you’re first starting out, have a trusted accountant help you set up a system for managing finances. As you gain success, you may choose to hire a bookkeeper or outsource financial management tasks. You will still need to closely monitor your company’s financial status and set goals accordingly, but delegating some of the administrative tasks can free up your time to focus on more important matters.
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