Whether you wish to turn your idea into a start-up or already have an established small business, optimum use of funds is the key to success. Even small things like planning for off-seasons, renting instead of buying and using freely available technology can go a long way in building your business. Below are 11 financial tips that would help small business owners manage their finances better.
Invest in technology
Gone are the times when only brick-and-mortar office was sufficient to clock decent sales. In today's world, online presence is a necessity. Many businesses have lost the race by not going online with the changing business landscape. On the contrary, many small businesses have reached great heights by selling their products globally. Bricks and clicks is the new definition of a business location. Also, many freely available applications can simplify accounting and help track various aspects of business.
Basic motive of a contingency fund is to provide financial security in times of desperate need such as medical emergencies. Ideally one should have six months' living expenses as contingency fund. Start building such a fund and invest it in debt mutual fund so as to get higher returns than savings account and yet enjoy liquidity.
Avoid costly credit
While financing your business, cost of credit is a critical factor. Especially in the initial months of operation, when the business has not yet reached break-even point. The financing of the business should be done keeping the interest cost at bare minimum. This would help in reducing cost and attaining profitability earlier.
Keep separate bank accounts
The business and personal bank accounts should be kept separate. This would provide a twin benefit of easier accounting at the end of the financial year for tax ascertainment purposes and would also eliminate the situations of cash crunch in business caused due to withdrawals for personal expenditure.
Bad debts refer to debt that cannot be recovered. Bad debts are created when credit sales become worthless. The business owners should not carry these bad debts into their financials year after year. Instead these should be written off in the next year so that a healthy financial position of business can be portrayed to potential stakeholders.
Review your insurance
Insurance provides much needed financial security for your dependents, who could be your ageing parents or your children. With time one should increase their insurance cover so as to cover all their dependents. Also buying insurance early in life would be cheaper as compared to buying it later in life. Ideally, the insurance cover should be 10 times your annual income.
Plan for Big Expenses
Small business owners should spend wisely as a cash crunch could adversely affect business functioning. Planning a year in advance for large expenses can help reduce the financial burden and ensure your cash flow position stays strong even in the tightest months.
Invest a portion of income for retirement
You would not want to consume your time during retirement thinking of ways to keep the money coming. The best way is to plan early. Start by investing some part of your income to fund your retirement. We often miss factoring in inflation while thinking of retirement. Consider inflation and you would realise how expensive retirement would be.
Plan for off-season with a reserve fund
Businesses do not give consistent sales month on month. Most businesses are seasonal in nature. Therefore, it is important to create a steady flow of income. To accomplish this, a proportion of income in months of high sales should be diverted towards a reserve account that would help to pay for expenses in the off-months.
Build and track your credit score
Businessmen should be wary of their credit score as this is a critical factor for securing credit. A credit score of 750 and above is ideal. Personal credit score of owner matters while availing a loan for business.
Renting instead of buying
Renting equipment instead of buying would help to keep the cost low. This saving in cost can be utilised in other areas to make the business more productive.