Small business owners have a lot on their plates. Not only do they need to worry about the day-to-day tasks of running their businesses, but they also need to ensure that their finances are in order. Around 70% of small businesses fail within the first ten years, and one of the main reasons for this is poor financial management.
You must know how to manage your finances properly if you’re a small business owner. Here are some tips to help you get started:
1. Keep track of your income and expenses.
Knowing how much money is coming in and going out of your business is essential. This will help you make informed decisions about where to allocate your resources. You can use accounting software to track your income and expenses or hire an accountant to do it for you.
Some business owners also like to keep a personal budget to track their spending. This can be helpful if you’re trying to save money or get a better handle on your finances. You can use a budgeting app or spreadsheet to get started. Just ensure you include all of your business-related expenses in your budget.
2. Avoid commingling personal and business funds.
It’s essential to keep your personal and business finances separate. This will help you stay organized and avoid any potential legal issues down the road. You should open a business bank account and get a business credit card for business-related expenses.
Significant expenses should also be kept separate from your personal finances. For example, if you’re taking out a loan to buy new equipment for your business, make sure the loan is in your business’s name. This will help you avoid personal liability if you can’t repay the loan.
Housing loans should also be kept separate from your business finances. Because a home is such a large purchase, it may be tempting to use business funds to help with the down payment or monthly payments. However, this can put your personal assets at risk if your business fails. Never use your home as collateral for a business loan.
3. Create a financial safety net.
Unexpected expenses can pop up anytime, so having a financial safety net in place is essential. This can help you avoid tapping into your business funds or going into debt if something unexpected comes up.
One way to create a financial safety net is to set aside money in a business savings account. This can help you cover unexpected expenses without dipping into your operating funds. You can also use a line of credit or business credit card for emergency expenses. Just be sure to repay the debt as soon as possible, so you don’t rack up interest charges.
Some entrepreneurs also get business insurance to help cover unexpected expenses. This can help protect your business if a natural disaster or theft disrupts your operations. You can get business interruption insurance, property insurance, liability insurance, and more.
4. Make a plan for slow periods.
Every business has slow periods, so it’s essential to be prepared for them. A slow period can quickly become a financial crisis if you’re not careful. You may be tempted to cut costs by laying off employees or skimping on marketing, but this can do more harm than good in the long run.
Instead, it would be best if you had a plan in place for how you’ll manage during slow periods. Many businesses avoid layoffs by having their employees work reduced hours. You can also offer employees paid time off or unpaid leave during slow periods.
If you’re struggling to make ends meet during a slow period, you may need to take out a loan. Find a loan with low-interest rates and flexible repayment terms so you don’t put yourself in a difficult financial situation.
5. Stay on top of your taxes.
Paying your taxes on time is essential for both you and your business. You may be charged interest and penalties if you’re late on your taxes. This can quickly add up, putting you in a difficult financial situation.
It’s also essential to file your taxes correctly. If you make mistakes on your tax return, you may be audited by the IRS. This can be time-consuming and stressful, and you may owe additional taxes. You should always consult with a tax professional to file your taxes correctly. Ask about any deductions or credits you may be eligible for so you don’t overpay on your taxes.
These tips can help you manage your finances and avoid financial difficulties. However, if you find yourself in a difficult situation, don’t hesitate to seek help from a financial professional. They can help you create a plan to get your business back on track. With proper financial management, you can keep your business running smoothly for years to come.
