The success of any business depends on more than simply the quality of its products and services. Sound business financial management is essential for keeping your business running smoothly, and small business owners who manage their finances well will discover that they have more opportunities to grow.
If you were to grade yourself on your financial management skills, how would you go about it? Even if you don't consider financial planning to be your strong suit, there are some basic ways to improve your business financial management.
1. Identify your regular expenses
In 2022, small business owners reported seeing revenue grow by 87%, but their profits dropped by 4%. The problem was simple: inflation caused their business expenses to cut into their profit margins. As a business owner, you should take time to identify your most regular expenses to evaluate how they impact your bottom line.
Common expenses include:
- Real estate costs
- Business insurance
- Payments on business loans
- Bank fees
Managing small business finances starts with evaluating your regular expenses and finding ways to optimize your outgoing cash flow to maximize our profits.
Reduce overhead costs
If your regular expenses are cutting into your profits, then you may want to look for ways to reduce these costs. Common strategies include the following:
- Negotiating new vendor contracts
- Refinancing real estate or business loans
- Automating core processes to get more done with less
- Outsourcing routine business processes such as accounting or marketing
As an added benefit, reducing these regular expenses can free up cash that you can subsequently use for new opportunities or invest in equipment that will help your business grow.
Pay bills strategically
One approach to working capital management is to stagger the way you pay your bills. For example, if you're paying employees and utility providers at the same time each month, you'll find that you have an enormous monthly drain on your cash.
Instead, stagger the way you pay your bills. Pay one bill during week 1, another bill during week 2, and so on. This doesn't actually change the amount you owe, but it can help you maintain a more uniform amount of working capital, which is a crucial aspect of your company's financial health.
2. Monitor your financial position
Keeping track of your expenses is just one way to monitor your financial position. Your financial position refers to the current balance of your company's assets, liabilities, and equity. Finance leaders rely on the balance sheet to keep track of their business finances, though businesses should also keep records of several key elements to protect their financial health.
Cash flow management
Cash flow refers to the amount of money coming into or out of your business at any given point. Positive cash inflow means that you have money coming in, and negative inflow means you have more money going out than coming in. Cash flow problems can spell doom for any business, as it may mean that you don't have enough money to cover your financial obligations, including payroll.
Your company's cash flow will be recorded not on your balance sheet but on your cash flow statement. Proper cash management is vital for keeping your business afloat. And if you manage your cash flow well, you'll have more money on hand to invest in new business opportunities.
Monitor your business credit score
In addition to monitoring your business financials, it's important to keep track of your business credit score. Much like a consumer credit score, banks and lending institutions use this number to evaluate your credit risk.
The three major commercial credit bureaus include:
- Dun & Bradstreet
These companies allow you to request a free copy of your business credit report once each year. Make sure to review your score and look for any irregularities or errors that may be lowering it. And just like with consumer credit rankings, it's important to pay your bills promptly to obtain and maintain a high score.
Your score is further affected by your credit utilization ratio. So if you maintain a high balance on your business credit cards (say, 30% or more of your credit limit), you may see your score reduced. Keeping tabs on your credit is also an effective financial management strategy, as it will impact your creditworthiness and ability to secure financing.
3. Ensure customers pay you on time
Few circumstances will impact your cash flow like unpaid invoices. As a small business owner, you can maintain a strong inflow of cash by ensuring that your customers pay on time (or early) whenever they do business with you. There are several strategies that you might consider employing to encourage on-time payments.
Offer multiple payment options
First, you might use a payment gateway that enables customers to use multiple payment options. For example, your clients and customers may prefer to pay with a credit card, ACH payment, PayPal, or other forms of electronic payment. Offering a variety of options may encourage your customers to pay in a timely manner, which also keeps cash flowing into your business.
Automate the invoicing process
Automation can be a benefit to both you and your customers. Instead of sending paper invoices by mail, use an AR/AP system that sends invoices electronically. That way, customers have the invoice as soon as the project is completed or the goods are delivered.
The best software can even send reminders so that you never see late or delayed payments. You can even set up recurring invoices for your regular customers, which is another "hands-free" way to manage your business income and ensure consistent, on-time payments.
Penalize late payments
If late payments are a consistent problem, you might consider attaching penalties for late payments. Make sure that your payment terms give a clear deadline. A common deadline is simply "net 30," which means that the customer has 30 days to pay the bills after receiving the invoice to render payment.
Should the customer miss this deadline, you might charge an additional 10–15%. This penalty will prompt customers to pay more readily to avoid this penalty — though it's essential to always make sure that your customers understand these terms up front.
Incentivize early payments
On the other hand, you could also incentivize early payments, such as by offering a 10% discount to any customer who pays their invoice within a week of receiving it. Even though you won't receive the full payment amount, you may find it to your advantage to have the cash now rather than wait for the full amount later on. This incentive may also reduce the number of unpaid invoices you have in circulation.
4. Keep up-to-date accounting records
Tactical financial management demands that you keep up-to-date accounting records to monitor your most important financial data. This is especially vital when it comes to business planning, as your records will impact your day-to-day operations as well as your long-term business decisions.
But what types of accounting records should you pay the most attention to? Here are some broad categories and examples.
Your financial statements will offer the most detailed record of your business finances. These statements include your company's:
- Balance sheet
- Income statement (aka profit and loss statement)
- Cash flow statement
- Statement of changes in equity
These aren't just good for you and your finance team; they are also important documents for company stakeholders.
As your company grows, your leaders and investors may want to see some basic accounting documents to keep track of your financial performance. These same documents should also be used to update your business plan, which can be important if you need to raise money for future projects.
While your financial statements provide a snapshot of your business finances, the ledger will also record transactions on a day-to-day basis. Many small business owners use a general ledger to record all transactions and subsidiary ledgers that are tied to specific accounts. Whatever your strategy, good financial management demands that you keep tabs on your finances at both the high level through financial statements and the granular level with documentation for each transaction.
Source documents can include a range of other related financial documents, some of which you might use for tax deductions. These might include supplier contracts, receipts for business expenses, or utility bills.
5. Stay on top of taxes to meet tax deadlines
Don't forget that, as a small business owner, you'll likely have to make quarterly tax payments. You can find a schedule for 2023's estimated tax payments on the IRS website. Finance teams should ensure that you stay on top of these tax obligations, including your federal tax, state and local taxes, and all payroll taxes. Small business owners should also take extra steps to manage their finances more strategically.
Separate business and personal finances
If you haven't already done so, it's vital that you separate your business finances from your personal accounts. Mixing the two just creates confusion when it's time to pay taxes. It also means that you'll be on the hook for any debt should your business fail. Besides, by opening a business bank account, you'll have access to more great features, some of which can be useful if you ever need a bank loan or any other type of financing.
Deduct qualified business expenses
Even if you can't reduce or eliminate these business costs, you can still deduct them from your company's annual income tax return. Business owners are allowed to deduct virtually any business-related expenses from their taxes, including:
- Travel expenses
- Your home office
You can also deduct interest paid on a small business loan from your taxes, as well as premiums paid on your business insurance. Just make sure to document these expenses for your own records to protect your business from an audit. Many accounting software programs offer receipt scanners and other document storage features to help you maintain digital records of your most regular expenses.
6. Invest in equipment and automation
A final aspect of your financial operations management is to upgrade any equipment that your business owns or to invest in new equipment and technology that streamlines your workflow and boosts your efficiency. But how exactly does automation improve your business financial management? By investing in new, automated tools, financial managers and accounting teams can experience two key benefits that transform your company.
The first benefit is automation. The most advanced tools assist with financial managing by automating your most regular tasks. For example, BILL assists in automating your accounts payable/receivable processes, allowing your teams to get more done with less.
Thanks to automation, you can grow your business without having to increase your company headcount — at least for your accounting department. And your existing workers will be thankful that the software reduces stress as well as the errors that come in through manual data entry.
Second, advanced software systems can provide a greater level of analysis than you've ever had before. You'll gain valuable insights into your business finances, and that same data can be used to make well-informed financial decisions about your company's future. Your business data can further highlight areas of inefficiency or weakness, allowing you to implement financial controls that monitor your business processes and give you a greater degree of control.
Business financial management made simple
BILL makes it easy to manage your small business finances. Our intuitive, innovative accounts payable software provides a platform for you to enter bills, customize workflows, and streamline your approval process. BILL integrates with many common accounting software providers and gives you greater flexibility and control over your payments.
"Payables went from being my whole job, probably 30 hours a week just managing stacks of paper, to maybe 5 hours a week." - Katherine Harvey, Co-founder of Bare Bone Broth
To learn more, explore BILL's AP software platform today and see how you can transform your business into a finely tuned machine.