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Sound financial management is crucial for the success of any small business. Financial management refers to practices including bookkeeping, creating financial statements, accessing financing, and developing accurate projections. Small business owners who manage finances efficiently can make more profitable decisions that benefit the business in the short and long term. Follow these small business financial management tips for enhancing your business’s financial health and success.

1. Budgeting

Create a detailed budget that includes all income and expenses. Budgeting helps you see the money coming in versus what’s going out, which can help prevent overspending and ensure you have the funds available for all necessary expenses.

Regularly review and adjust your budget based on the financial performance of your business.

If you see any potential issues, such as overspending or a lack of capital, you can implement plans to address them.

2. Cash Flow Management

Monitor your cash flow regularly to ensure there is enough liquidity to cover business expenses, including payroll, inventory purchases, and all other operational costs. You can determine your current cash flow by subtracting expenses from income, based on when accounts payable due and accounts receivable are expected to come in.

To promote a healthy cash flow, negotiate favorable payment terms with vendors and suppliers and encourage timely payments from customers.

3. Separate Personal and Business Finances

Clearly distinguish personal expenses from business expenses to avoid confusion when it comes to your business accounting. Maintain business credit cards and a bank account that are used solely for business purposes. Then, use these statements to monitor your business financials.

If your business and personal funds are commingled in one account, you risk dipping into business funds to cover personal expenses and vice versa. Commingling business and personal funds can also lead to difficulties with an audit.

4. Financial Statements

Understand and regularly review your financial statements, including the profit and loss statement, cash flow statement, and balance sheet, and use these statements to identify trends, make informed decisions, and track the financial health of your business.

Read our blogs on what the cash flow, balance sheet, and profit and loss statements are each used for and the financials included in these important statements.

5. Record Keeping

Bookkeeping is the backbone of small business accounting. It means keeping organized and accurate records of day-to-day financial transactions, including invoices, receipts, data entries, and categorizing each transaction.

Utilizing accounting software, such as QuickBooks, allows you to do much of this on your own, or you can hire a professional bookkeeper to manage your business’s financial records.

6. Debt Management

As your business grows, you may want to take out a small business loan to finance the purchases needed to facilitate that growth. However, getting approved for financing will be challenging if you have poor business credit. Having bad credit can also impact the rates you’ll pay for business insurance and can prevent your business from landing contracts.

To maintain a good business credit score, be cautious about taking on unnecessary debt and prioritize paying off your existing high-interest debts. You can also negotiate favorable terms with creditors and explore options to refinance debt if needed.

7. Tax Planning

Every business has to pay federal taxes, and based on how your small business is structured will determine how your taxes are paid and at what tax rate. Have a clear understanding of your tax obligations and deadlines and consult with a tax professional to ensure compliance.

With proper tax planning, you may be able to take advantage of available tax deductions and credits to minimize your tax liability. If you struggle to pay your quarterly estimated tax payments, you can change to monthly tax payments to ease the financial burden. 

8. Emergency Fund

Successful small businesses that follow sound financial management practices can still face unexpected challenges. This is why keeping an emergency fund is critical for all small businesses.

To create an emergency fund, you can open a business savings account. Commit to making regular deposits to build up your cash reserves, aiming to have at least three to six months’ of operating expenses set aside. This way, you’ll have a cushion to cover unexpected costs or slow revenue periods.

9. Insurance

Business insurance, also called commercial insurance, protects a business against claims and lawsuits. Without insurance, you would be responsible for covering the high costs of these claims, which could put you out of business. This is why business insurance can be a wise investment, as it protects your small business and its assets.

It is essential to evaluate your small business insurance needs to mitigate risks associated with unexpected events. Regularly review and update your insurance coverage as your business grows or changes.

10. Continuous Monitoring and Adaptation

Set aside time weekly or monthly to review and monitor your books, even if you have a bookkeeper. This will make you more familiar with your business finances so you can detect any anomalies, potential financial crimes, and gain valuable insights to help you make better decisions that impact your bottom line.

Continuously monitor your financial performance and adapt your business plan based on the changing landscape. Also, stay informed about economic trends, market changes, and industry developments so you can adjust your financial plans as needed.

By focusing on these financial management tips, small business owners can increase their profitability and keep their business running smoothly.

The Oregon SBDC offers small business financial and accounting classes, both in-person and online, statewide. To locate classes at an SBDC near you, click here. 

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