As a small business owner, you don’t have unlimited financial resources to battle erratic market changes and inconsistent economic conditions. For your business to thrive amidst increasing competition, you need to maintain a steady cash flow so you can stay on top of your finances to welcome growth and expansion. Keep in mind that having a well-thought-out plan of your financial expenses is critical to avoid unforeseen debts that might put your resources in great danger.
However, for many entrepreneurs, keeping track of business expenses is more of a challenging task than a simple responsibility. As a business owner, you have an obligation to pay the rent, settle the bills, restock products, replenish supplies, pay employee salaries, and pay for other expenditures in line with operations. It is important to learn the art of careful financial planning and figure out how to allocate as well as how to spend funds wisely.
Here are some tips on how to effectively manage expenses without risking your business.
Separate business and private expenses
It’s easy to lose track of expenses especially if you are the one personally handling the financial aspect of the business. Even if you have free access to funds, you should never mix corporate and personal expenses. Mixing them together is a recipe for disaster, namely unexplained losses, tax issues, private liabilities, chaotic accounting records, and difficulty gauging the profitability of your trade.
When managing expenses for your small business, make a point of creating a clear distinction between your personal and business budgets. Your personal loans, as well as other spendings, should never be mixed with business credits, funds for replenishment, or budget for operations. Put everything in writing so that when tax time comes, you’ll never have to worry about scrutinizing your books.
- Maintain separate bank accounts, one for your business and one for yourself.
- Don’t forget to pay yourself as soon as your business takes off, start with 10% of earnings.
- Even if you are financially able, be frugal and keep your personal expenses low.
Always pay bills on time
Whether it’s a utility bill, loan statement, invoice from a supplier, rent payment, or employee salary, it’s imperative that you pay your bills on time. Don’t wait until the last minute to settle your dues, but instead pay them early to avoid penalties and late charges. Although these fees might be small and negligible, they add up over time, resulting in a greater loss of money.
One way to make sure you don’t lose track of your scheduled expenses is to set up monthly reminders. Small business owners should make a calendar of expected costs, the payment deadline, the source of funds, and the people responsible for settling the payment. Expense recording in a timely and regular manner is also essential to keep your financial records consistently up-to-date.
- Avoid hurried payments and settle your bills at least one week before the deadline.
- If possible, adjust cutoff dates so that no bills are falling between uncertain times.
- Tax returns nearing the deadline should be paid as soon as possible to avoid serious penalties.
Stay on top of your daily money management
We all know for a fact that running a business is not easy, and there are certain responsibilities you need to carry out in order to reach success. One of these responsibilities is to stay on top of your daily money management. It might sound exhausting and time-consuming, but keeping track of your expenses on a daily basis will help manage your accounting at a sensible level. Additionally, reviewing your day to day costs allows you to see where the money goes.
Another tip when managing expenses for your small business is to make financial projections and fine-tune things if outcomes are too costly. Take advertising for example, the money you spend on promoting your business can never be recovered. Instead of spending thousands of dollars on premium advertising services, save money on low-cost marketing such as partnerships, blogs, social media promotion, and strengthening brand visibility.
- Hire professional accountants to oversee your expenses, or otherwise use accounting software.
- Send out invoices as soon as your products or services are delivered.
- Monitor your finances by making weekly, monthly, and annual reports.
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Get familiar with financial terms
Although it’s not mandatory to know everything about finance and accounting, familiarizing yourself with basic terminologies will help you better understand the meaning behind each term and number. This way, the next time you plan your finances, it’ll seem less technical and won’t feel like you’re trying to understand a completely different language.
Gross revenue is the total sum of all monies received, without deductions or expenses. Expenses, on the other hand, are the things that prevent you from pocketing all revenue, such as rent, tax, utilities, debt etc. Net income is the value of gross revenue less expenses, while cash flow simply equates to the availability of funds that you can easily use or withdraw. All businesses will, at some point in time, get to a break-even point where the total revenue equals the total expenses. The bottom line here is that after the break-even point comes profitability, which is essential for every small business.
- When net profit is greater than your expenses, it means that you have a profitable business.
- Income statement measures profitability, and is computed by revenue less the year’s expenses.
- If time permits, consider attending a basic accounting class to widen your perspective.
Know your alternatives
The last but certainly not the least of these tips to manage expenses for your small business is to determine your alternatives when it comes to sourcing funds for your business. You can opt for term loans, equipment financing, or business lines of credit where owners are given access to predetermined funds. Other possible sources of capital include your friends and families, investors, and crowdfunding.
Expenses managed in the right way will always lead to a productive cash flow, and one proven way to achieve this is to keep track of your financial goals. In this day and age, web-based financial applications are gaining a lot of popularity due to their ease of use, wide availability, and customization options. Some financial management apps include: