Could you imagine a small business that kept their savings in a piggy bank? They would lose track of their finances and probably end up investigated by the IRS. While this is an exaggerated scenario, many small business owners fail to see the importance of highly regulated finances. Ultimately, a good grip on your financial situation could make all the difference between expansion and shutting down. For example, a poorly planned budget could mean your business is unnecessarily hemorrhaging funds—funds that can be used for inventory, payroll or other essentials.
In short, financial management is the cornerstone of successful small businesses. As such, small businesses need to be pros in financial literacy. To help you take charge of your money matters, here are four steps to financial literacy for any small business.
Small Business Basics: Four Steps to Financial Literacy
1) Manage your accounts receivables - Accounts receivables make up a big part of your lifeline as a small business. Just as your personal finances rely heavily on your income, small business finances gravitate around accounts receivables. Taking charge of your accounts receivables allows you to gauge and control your revenue. This gauge will allow you to create cash flow projections, anticipate your budget, consider loans and stay on top of your credit. Between keeping track of payments and sending invoices, managing accounts receivables can be a lot of work. You will need your fair share of financial literacy to maintain your accounts receivables and a reliable accounting software can help.
2) Budget for the future - Small business budgeting comes in all different forms. One of the primary concerns for small businesses when budgeting is cash flow. While you may have a good deal of capital, cash flow greatly determines your ability to operate on a daily basis. Budgeting your cash flow carefully will keep you safer in the long run, so you do not find yourself scrambling when the bills are due. A number of tools can help you determine cash flow, such as this Cash Flow Calculator from the American Institute of CPAs.
Small businesses can create a budget based on the fiscal year, but experts suggest a monthly budget to keep a close eye on finances, according to Intuit. A budget will help you control your finances now, and any past budgets allow you to predict financial patterns. To create a budget, you will have to balance your revenue with your costs. Revenue can come from a variety of sources, including accounts receivables, interest and sales. Costs can include any expenses such as rent, insurance and credit card payments.
3) Carry credit wisely - Credit can help a business in its daily operations, but a poor credit score may severely limit a small business’ ability to expand. Just like individual consumers, small businesses have a credit history that is tracked with a credit report. A positive credit history can mean favorable loan rates and an easier time securing credit; on the other hand, a negative credit history can result in high interest rates and denials for loans. Whether you want to build a business line of credit or make use of business credit cards, spend with credit carefully and keep an eye out for the best loan terms.
At the end of the day, wise credit usage means paying off your balances on time. If you cannot pay off the whole balance, make the maximum possible payment. You should also check your credit report every year for any potential errors. (Note that you should register for a DUNS number to track your business credit history).
4) Prepare for tax time - Many small businesses scramble every April to file their taxes. However, early preparation does double duty: you can be ready for tax time and stay on top of your files in general. Tax time just means a close look at the financial matters you should have considered all along: your revenue, expenses, capital, etc.
Careful tax consideration often translates to saving a lot of money. After all, you want to take advantage of all small business tax breaks available to you. For a complete list of small business tax forms, visit the IRS’ Small Business Tax Center.