Financial management is one of the first things aspiring small business owners need to learn. Every business-related decision impacts your cash flow, profits, and the overall financial condition of your company. Failing to manage your finances effectively can lead to cash flow issues, such as running low on working capital, failing to collect invoices, and making late payments to creditors.
Keep your finances in order by implementing the following money management tips for new entrepreneurs:
1. Don’t Borrow Money Unless You Have a Clear Financial Plan
More isn’t necessarily better, especially when it comes to working capital. Many business owners make the mistake of borrowing more money than they really need, and as a result, they end up paying more than they can afford. If the capital comes from an investor, business owners may give up more equity or end up working with a partner they don’t need or want.
Before you borrow money from a lender, be sure that you have a clear plan for using the money. Create a comprehensive business plan to see where your business is going and which areas need additional working capital. Lenders and investors will be keener to invest in your business or lend money if they know where your business is headed.
2. Choose the Right Loan for Your Business
If you’ve deduced that you need financial assistance, you can apply for a small business loan. It’s one of the best ways to secure additional working capital to grow and expand your new business. However, you need to do your research and look for the right loan that supports your venture.
Here are some of the loan options you can choose from:
· Business term loans
· Business lines of credit
· Invoice financing
· Purchase order financing
· Equipment financing
· Real estate financing
These loans are different from one another, so it’s important to familiarize yourself with each loan type so you could choose one that’s best for your business. Once you’ve decided on a loan, be sure to review the loan documents and know the interest rates, repayment terms, fees, etc. It’s best to have an attorney or an accountant review the terms with you.
3. Reduce Expenses and Increase Revenue
Reducing expenses and increasing revenue is a surefire way to manage your finances effectively. If managing your funds is becoming a challenge, evaluate your finances and look for ways to cut costs and increase revenue. Knowledge management for bootstrapped companies can also be helpful to monitor every project the business has to undertake. Check for areas where you can scale back. For instance, you can try searching for new vendors that offer lower prices or bulk discounts.
On the other hand, you can increase your revenue by improving your marketing strategies, adding new products your target audience love, and creating loyalty programs for your customers.
4. Build a Cash Reserve
Financial emergencies can happen to anyone, so it’s important to prepare. Even if you’re diligently following these money management tips, you could be reaching into your personal finances to cover an emergency expense
It’s wise to set aside a small amount per month for your cash reserve. This helps you manage your finances properly when you’re in a pinch. Start by opening a business savings account and regularly depositing money into your cash reserve.
5. Separate Business and Personal Finances
Even if you have a one-person business, it’s crucial to separate business and personal finances early on. Combining all your funds can result in disorganized records, overspending, and failure to track growth opportunities. You might also be prone to dipping into your business finances to fund personal expenses. Having a separate bank lets you easily track profitability, monitor your spending, and reconcile your books.
Financial management is an essential aspect throughout the life of your business. Many aspiring business owners often feel overwhelmed when it comes to managing finances. Don’t hesitate to ask for help from a professional or you can contact a Small Business Development Center in your area and they can connect you with a mentor.