There are numerous challenges that come with starting and running a small business. Nevertheless, none is more important than money management. The Small Business Administration identifies lack of money, poor debt management and the failure to distinguish between personal and business cash, as the main reasons small enterprises collapse.
Yet, many money problems are easily avoidable. This is especially so for small businesses since the decisions of just one or two people can get the company moving in the right or wrong direction. Here are a couple of money management tips for the small entrepreneur.
Business revenue can be pretty deceptive. If you haven’t run a company before, staring at the accounts and seeing hundreds of thousands or millions of dollars in annual turnover is pretty exciting. You have to keep reminding yourself that this isn’t your profit.
In any case, even if the business does start to generate a tidy profit, it would be best to reinvest it in growth. Resist the temptation to change your personal spending habits in tandem with what you perceive as the business’ stellar growth.
In addition, constantly look for opportunities to cut down on your business expenses. For instance, buy second hand equipment and furniture where possible. Also, do a little research on which are the best banks for small businesses.
Enroll for a Basic Accounting Course
You may have a phenomenal business idea and developed a well-thought-out business plan that demonstrates how you envisage everything will play out. However, entrepreneurial foresight is not synonymous with accounting expertise.
You could hire an accountant to handle money matters but you’ll be a much better entrepreneur if you understand at least the basics of accounting. Remember that the accountant is simply an employee or contractor. They could share their professional advice but ultimately it’s up to you to make the big decisions. Enroll for an introductory accounting course with a local community college or online.
Separate Personal and Business Expenses
There are multiple reasons to keep your personal and business accounts separate. These include personal liability, tax compliance and coherent accounting records. When both your personal and business finances are prospering, it’s often easy to adhere to this separation. It’s a whole different ball game when you are in financial distress in either or both sphere of your life.
There’s a particularly strong urge to dip into business funds to satisfy personal financial needs or wants. Best practice is to develop a business budget and a personal budget then strictly adhering to each.
Pay Bills on Time
The world’s largest corporations boast financial war chests that run into the billions of dollars and a reputation that spans decades. Given their enormous size, they have substantial leverage with creditors. Small businesses have no such luxury. The taxman, lenders, creditors and vendors are often more aggressive with small businesses since they perceive them as riskier.
To build your reputation and avoid falling into needless problems, consistently pay your bills on time. In addition, late payment fees on your loan and credit card can spiral out of control pretty quickly. Your profit margins are likely too thin to withstand such unexpected expenses.
The better you understand your personal and business finances, the more likely you will be to make the right money management decisions.