Managing your business’s finances is one of the most challenging elements of operating a small business, especially if you don’t have a background in finance. What the heck is a balance sheet? What’s the difference between gross revenue and total revenue? When is the right time to expand?
As a business owner, the best thing you can do is educate yourself. Having a functional knowledge of financial management makes it easier to conduct day-to-day operations and stay on top of your budget so you don’t fall behind or slip into bad habits that could negatively impact your business later on. Understanding the basics of business finance will help you create a stable financial future for your business—and yourself.
Keep reading to get 10 of our best small business finance tips:
1. Brush up on your lingo
The business world is full of its own unique terminology and jargon. Without knowing the buzzwords, you may struggle to manage your finances, keep up with your competition, and stay on top of industry trends.
Before you start digging into the nitty gritty of your business’s finances, familiarize yourself with these terms:
- Balance Sheet. Your balance sheet is your best friend. It’s a major financial document that lists assets, liabilities, and the capital of your business within a certain period. Your balance sheet provides a crucial snapshot of your business’s finances, and can help determine if your business qualifies for a loan or additional credit when it’s time to grow.
- Liabilities. This consists of any financial expense or amount owed, such as products or services bought on credit from a supplier. This falls under the category of “Accounts Payable”.
- Assets. This consists of items you own, including cash and items converted into goods. Common assets are inventory, vehicles, property, and supplies.
- Gross Revenue or Total Revenue. Gross revenue is the total amount of money you made from clients who have purchased your products or services. Gross revenue is also called “total revenue” because it refers to the amount earned before deductions and expenses are applied. “Net Revenue” describes the amount earned after any deductions or expenses are calculated.
- Expenses. This consists of products or services that you must pay using your gross revenue, such as rent, payroll, utilities, and taxes.
- Customer Acquisition Cost (CAC). CAC refers to how much it costs your business to convince a potential customer or client to purchase your product or service.
- Customer Lifetime Value (CLV). This describes the total worth of a customer over the entirety of their relationship with your company. It’s especially important for businesses that rely on repeat business.
For more small business finance tips, check out our blog.
2. Separate business from personal expenses
It can be tempting to support your business using your personal finances, especially if you’re a new business and have not yet established business credit . Do your best to avoid this—mixing business and personal expenses complicates matters when it’s time to do your taxes. It’s also more likely to lead to unexplained losses, and can put your personal assets at risk.
Instead of relying on your personal finances, start a separate bank account for your business, and pay any business expenses out of this account. You will eventually qualify for a business credit card, which will make it easier to separate your expenses as well as help build your business credit.
3. Keep up with day-to-day management
Staying on top of the day-to-day management of your business’s finances is the simplest way to keep everything organized and under control. This means:
- Accurately tracking income and costs. If you struggle with this, don’t hesitate to ask for help from an accountant or bookkeeper.
- Regularly reviewing your costs and return on investment (ROI) to determine if you are spending your money effectively, or if you’re investing in activities that aren’t paying off.
- Making financial projections to address any possible future obstacles or opportunities to grow.
- Monitoring your books. Set aside time every day, week, or month to review your finances, even if you’re working with an accountant or bookkeeper. This way, you’ll always be familiar with your financial situation, and you’ll be armed with the information you need to make smart decisions for your business.
Establishing good habits and protocols such as these will make it easier for you to manage your finances in the long term.
4. Manage your cash flow
Lack of working capital or limited cash flow is the most commonly reported problem faced by small businesses, and is a prevalent cause of business failure.
One of the simplest ways to manage your cash flow is to avoid premature spending. Wait till you have consistent revenue coming in before you make any big investments in marketing or inventory—these activities can strain your cash flow, leaving you in a tough spot if you encounter any unexpected challenges or expenses. If boosting your marketing or acquiring new inventory is the next step in growing your business, a working capital loan can provide the infusion of cash you need without compromising your cash flow.
5. Expand wisely
As much as you may want to grow your business quickly, avoid expanding too fast or drastically. Growing too quickly can easily max out your cash flow, which can make it tough to maintain your day-to-day operations.
If you are in a good position to expand, a working capital loan can enable you to take advantage of opportunities to grow without cramping your cash flow. At Greenbox Capital®, we help small and mid-sized businesses across the United States and Canada grow by providing fast and easy alternative funding options designed to fuel the growth of small businesses, whether that means making improvements to your facility, investing in new equipment, or hiring more employees.
6. Become a green business
Some states have made eco-friendliness a standard, including Florida where businesses can receive a sales tax exemption for using renewable energies. Not only does going green result in financial advantages for your business, it also makes a great story to share with your current and potential clients, especially as consumers shift their focus (and their dollars) towards supporting businesses that prioritize sustainability.
7. Rent space or equipment instead of buying
Leasing equipment can help you avoid maintenance costs and overpaying for equipment you only need for a short period of time. Renting space also makes it easier to relocate or expand.
8. Bill clients consistently
Every business deals with clients who are consistently late paying their invoices. Late payments can seriously restrict your cash flow, which can make it tough to operate your business on a day-to-day basis—and even tougher to grow.
Business owners should always follow up on outstanding invoices, but if you notice a chronic issue with a particular customer, you may also want to get more creative with your billing strategy. Try a “2/10 net 30” approach—if your customer pays within 10 days, they receive a 2% discount. Otherwise, the full payment is due within 30 days.
9. Don’t wait to take out a loan
If you wait till you’re in trouble to apply for small business funding, you are less likely to be approved. Instead, apply for a smaller loan when things are going well, and use the funding to boost your business. This will also positively impact your credit score, making it easier to get additional funding later.
10. Pay yourself
It can be tempting to put all your proceeds back into your business. As a business owner, you deserve to be compensated for your effort. Plus, paying yourself also ensures that your personal finances remain in good shape.
Managing your small business’s finances is no easy feat. Follow these small business finance tips to keep your books in order and ensure that your business is in a good position to succeed and continue to grow:
- Brush up on your lingo
- Separate business and personal expenses
- Keep up with day-to-day money management
- Manage your cash flow
- Expand wisely
- Become a green business
- Rent space or equipment instead of buying
- Bill clients consistently
- Don’t wait to take out a loan
- Pay yourself