How To Effectively Manage Your Company Finances

As a budding entrepreneur, you might not understand well on how to manage business finances. However, your great idea has a much better chance of surviving in the business world if you have a few simple business money management principles in your pocket.

No matter what stage your business is in, from start-up to fully established company, knowing your way around business finances will help you build a strong financial foundation for your business for years to come.

Establish business banking

If you’re using your personal bank account to fund your business, it’s time to set up a proper business bank account. Separating your personal and business finances will help you simplify your bookkeeping, avoid overspending and paint a clearer picture of where your business stands revenue-wise.

Keep your books in order

Well-kept books are good foundation for better business decisions. Budgeting, accounting, forecasting, tax planning, risk management — these are important aspects of managing your business finances as part of a comprehensive financial plan.

Staying on top of accounting and bookkeeping will allow you to set the right financial goals, whether that’s to invest more money in your business (for expansion, staff, or new inventory) or save for retirement.

Preparing ahead of time is also the best way to avoid tax season stress. Avoid common tax mistakes with organized records and bookkeeping. In addition to understanding tax deductions (many of the expenses you incur when running a business are tax deductible), learn how you can lower your tax burden as a small business owner.

Learn key metrics

An essential principle of business money management is learning the definition of key metrics that will help you assess your financial progress as you grow. Here are some key terms to keep in mind:

Cash flow: 

The amount of money that comes into and leaves your business each month. If you bring in more than you send out, you are cash-flow positive (always a plus).

Breakeven: 

When your business generates enough revenue to cover your expenses for the same period (such as a month, quarter or year).

Expenses: 

The regular costs of running your business, including things like utilities, shipping costs, packaging, annual licensing and manufacturing costs.

Gross revenue: 

The total revenue your business brings in before expenses are deducted.

Profit: 

When you subtract expenses from your gross revenue, you’re left with your profit.

Review your reports

You’ll need to regularly review some basic financial reports to keep track of opportunities in your business.

Balance sheet:

 A snapshot of your business’ worth. This report gives a 360-degree view of your business’ assets (what you own), liabilities (who you owe) and the net equity in your company.

Profit and loss (income statement): 

A snapshot of how much money your business is making or losing. This report shows revenues, expenses, profits and losses during a particular reporting period.

Cash flow statement:

A snapshot of your business’ liquidity. This report details how much cash you have on hand to meet your monthly debt obligations. Lenders also use it to determine if you’re a reasonable lending risk.

Take a close look at all your business expenses (direct and indirect) and overhead costs (fixed, variable, and semi-variable) to calculate your overhead rate, and monitor it on a regular basis. Review your business reports and assess your core business and financial operations in relation to your sales and operating margins.

Once you have a handle on costs and margins, you can leverage a variety of financial services and tools to manage your business funds and cash flow with business banking.

Obtaining financing is another tool to help your business grow. A business line of credit or business credit card can be a good option for short-term financing. For funding larger projects or business needs — like a renovation, equipment, or new marketing campaign — a business loan might be the way to go.

Establish payroll

Making payroll can be a challenge for many small businesses, even if they’re bringing in enough revenue. By optimizing your payroll process, you can improve your cash flow, making it easier to pay employees each payday.

The first step is to choose payroll software with direct deposit, which transfers your team’s pay directly to their bank accounts. With paper cheques, your money is put into a holding pattern, since employees will deposit their checks at different times. While it may seem like a minor detail, direct deposit can help you better control your cash flow.

You also want to select a pay schedule that follows all government guidelines and gives you and your team the most financial autonomy. An ideal pay schedule coincides with when you have cash coming in and allows you to pay your team as frequent as possible. When employees can get paid soon after they earn it, they can make more informed financial decisions.

Improve inventory accuracy 

Inventory accuracy is crucial during uncertain times. Some types of businesses are overwhelmed with excess inventory, while others are trying to keep up with a surge in customer demand. Both situations can lead to lower sales, a poor customer experience, and financial instability if businesses do not know what they have in stock. 

As many businesses go omni-channel to reach more customers, financial inefficiencies can arise if inventory isn’t being properly tracked across multiple channels. For instance, if a customer doesn’t know that an item, they wanted in store can also be purchased online, a sale is lost, one that could have helped a business move inventory that might soon be out of season. 

Mitigate supply chain risks

During the Covid pandemic, supply chain disruptions and volatility have impacted many businesses. Closely monitoring demand and working with suppliers to ensure availability can help business owners mitigate risks to product access and ensure your customer experience continues to be reliable and positive. 

Have agile supply chain strategies, track existing contracts and orders, and have backup suppliers to prevent disruptions from impacting your projected sales and forecasted revenue. To plan for the future, review your overall business and supply chain plans and consider proactively tracking additional costs related to your business continuity activities.

Conclusion

CrediLinq.AI has the tools to help you run your business – on your terms. We help you gain clarity on your business cash flow and health so that you can maximize your business opportunities when they come. See how CrediLinq.AI works and get more expert guidance for the next era of small businesses.