How to Manage Your Finances as a Small Business Owner

August 24, 2018

The ultimate goal for any business is to make a profit – to bring in more money than you pay out. It sounds like such a simple equation, but there are a multitude of factors that can influence profitability, and as the business owner you need to be managing all of them with equal effectiveness. At the heart of everything you do is the money you are using to operate your business; the capital, revenue and outgoings that dictate the end profits. For this reason, you will need to have a firm grasp of every financial aspect of the business in order to operate efficiently.

Budgets

As part of your initial business plan, you will have created a budget, detailing the projected income and calculated outgoings for the initial trading period. The accuracy of this budget will be fundamental to your success, for a miscalculation will cause an imbalance that could have severe consequences. If you underestimate any of your costs, you will be spending more than you anticipated, and that cash will have to come from revenue or further investment. Likewise, if you forecast a certain level of income and your revenue is below your forecast, you will struggle to operate on the reduced cashflow. Therefore, it is of paramount importance that you ensure your budget is as accurate as possible.

It’s always better to underestimate income and overestimate outgoings, because in both cases you will ensure you have sufficient cashflow for the trading period, even if your expected revenue is not as high as you would have liked.

Using your budget

Budgets are not static documents. They are tools to be used and revised as the business develops, and you should be referring to the budget on a regular basis so you can monitor how well the business is performing compared to your predictions. By comparing the forecast to the actual revenue and outgoings, you will be able to see any potential problem areas that could have an effect on your profits.

For example, it would be standard practice to base your supplier costs on the price of product at the time the budget was prepared. If that price increases at any point, then by entering the revised figures into your budget, you will be able to see how this could affect profitability and take steps to manage the situation. Staying ahead of the financial changes your business is bound to encounter will ensure you are being proactive rather than trying to correct an already damaging situation.

Taxes

The IRS has a fearsome reputation, and no-one wishes to fall foul of them or any other regulatory body. To ensure you make accurate tax returns, it’s best to employ a tax professional who knows exactly how to complete the forms, no matter how complex your financial circumstances.

Being sure of compliance is only one of the benefits of engaging an expert in this field, though. Because they know the tax system inside out, they will be able to advise you on everything you can claim for on your tax return, so you are never missing out on financial gains in your tax affairs. Selecting a tax professional who is right for your business is essential, as you will be working closely with them, and their knowledge and efficiency will have a significant effect on your business success.

Getting recommendations from people you know and trust is one of the best ways of finding the right tax professional, but failing that, make your own assessment based on their website and any reviews you can find. Look for signs they are progressive and forward thinking, for example using recognized, respected software systems such as UltimateTax. Check their qualifications too, rather than taking them at their word – you don’t want to hand such an important job to someone who lacks the high-quality qualifications they claim to have. You also want to engage someone who you can get on with, with whom you have a level of rapport. You will be working closely with them on a vitally important task, so you want to enjoy the process and feel comfortable trusting them with such a responsibility.

Bookkeeping

Your tax professional will take care of your tax returns, but the data they use will be based upon the information you give them. Likewise, all your management decisions will be based on the figures that are presented to you from your financial records. Therefore, it’s essential that whoever is in charge of keeping the books is knowledgeable and meticulous in their approach. Wherever possible, use software that makes the control of data less onerous and more accurate, for example, systems that can liaise banking, invoices and payments automatically. This will reduce the number of operator errors that are likely to occur, and improve the efficiency of the system.

You also need to make sure that whoever is inputting data and managing the records has a sound knowledge of the job and all its implications, and can operate proficiently. Errors in bookkeeping will affect all the decisions you make as a business owner, and incorrect data will cause your budgets to produce misleading forecasts. This, in turn, will impact on your strategic decision-making processes, which is based on erroneous data could lead you onto an ineffective or even damaging course of action.

Like all the functions of your business, the buck stops with you, the business owner. You can’t and shouldn’t attempt to do everything yourself, but instead learn to delegate and outsource effectively. Your role then becomes one of supervisor; allowing and encouraging staff to complete tasks efficiently, but not abandoning them completely. You need to keep an eye on the work they do to ensure they are managing the tasks as desired, find out when they need extra training or assistance, and ensure that their work is accurate and complete. By retaining this level of strategic responsibility, you’ll be able to keep a check of all your finances and ensure they are being managed well, and that is the key to a sound small business venture.