5 Great Financial Habits for Small Business Owners
Properly managing one’s small business finances is, in truth, pretty mundane. Sure, you might need to make a few critical decisions across your company’s life. But for the most part, you can do wonders with your small business by simply developing good financial habits – and regularly putting them to use.
You’ve probably heard the term “practice makes perfect.” That’s the idea that doing something over and over again will improve your ability over time. But perhaps a more accurate truism is “practice makes permanent:” the idea that doing the same thing over and over again will develop a habit.
And whether that’s a good or bad habit depends on what you’ve been practicing.
Today, we want to point you in the direction of five great financial habits for small business owners. And importantly, they stand out from most business financial tips in that they’re habits you can practice frequently in both personal and professional capacities – thus making them more likely to stick.
5 Great Financial Habits for Small Business Owners
#1: Understand Cash Flow
Profits are how much money is left from your revenues after backing out expenses such as salaries and bills. Typically, whether you’re projecting them or reporting them, profits tend to be attached to large time frames: quarterly, annually. “This year, we expect to make $1 million in profits.”
Cash flow is what happens in between.
Cash flow is the coming and going of money each and every day, when you actually collect revenues, when you pay employees and vendors. etc. And if you’re not good at managing your actual cash flow, your company could realistically project a $1 million profit, and you could still end up falling woefully behind on your obligations.
For instances, let’s say in January, you project $1 million in annual profits, but your “busy time” is the fourth quarter, when you expect to make $800,000 of those profits. You’re only expected to make $200,000 across the first nine months. So if you think you’re going to have more than $200,000 in obligations across those first nine months … well, you’d have better saved money from that previous fourth quarter.
You almost certainly already practice this with your personal finances. Let’s say you bring home $4,000 a month after taxes and have $3,000 a month worth of bills. In theory, you’re just fine. But if you’re paid $2,000 on the first and 15th of each month, and all $3,000 of those bills are collected during the first week of the month, you have to make sure to always save at least $1,000 of your second monthly payment – otherwise you won’t have enough cash on hand to actually pay your bills.
#2: Stay on Top of Your Credit
As a consumer, you know the importance of maintaining a high credit score. If you pay bills and loans on time and you keep your credit balances low, your score will improve over time, translating into more favorable interest rates when you need to make big-ticket purchases in the future.
The exact same thing goes with small business credit. Maybe you’ll need to take out a loan in the future to get you through a tough time. Maybe you’ll want to purchase real estate for your business. Or maybe you’ll need to buy an expensive piece of equipment. Well, if you’ve maintained strong business credit, you’ll be likelier to be approved, and at favorable rates, than if you’ve neglected your obligations.
#3: Build a Rainy-Day Fund
Every person, and every business, should have a rainy-day fund.
The premise is simple. Sometimes life throws you an expensive curveball – a broken car, a leaky roof – that you can’t afford out of your regular cash flow. But if you save some money month after month, you’ll be able to knock out that curveball while still being able to pay all of your bills on time.
Life tends to throw those curveballs at businesses all the time, including broken cars and leaky roofs. So make sure that when you’re profitable, you’re setting aside some of that profit so your next emergency isn’t your last.
#4: Understand the Cost of Time
“Time is money,” they say, and they’re not wrong. The most obvious example of that is the hourly wage – if a person can make $20/hour instead of $15/hour for virtually the same job, they’ll take the $20/hour. They want to make their time worth the most money they can.
But the concept starts to feel more abstract as it pertains to yourself when you’re a small business owner.
When you’re starting out, you’ll probably end up handling most tasks yourself. However, certain tasks have better returns on investment (ROIs) on your time than others. Especially early on, you can make some processes more efficient by using software and cloud-based tools. But as you try to grow, you’ll need new workers to tackle tasks that aren’t worth your time.
#5: Keep Your Books Up to Date
One of the basics of business management is putting together a budget at the beginning of every year. But that’s a pointless exercise if you don’t keep your books updated every month.
If you have no idea how your company is performing financially, every decision you make could be digging your business even further into the hole – and you wouldn’t even know it. Keeping your books up to date will give you an accurate picture of whether your company is under, at or over budget. And that can educate the decisions you make from there.
All that said, accounting is a difficult and time-consuming job – one that many small business owners aren’t proficient at, and one that should be handed off to professionals if possible.
McManamon & Co. can help. We’re an accounting, tax, fraud, forensic and consulting firm that serves small and midsize businesses. And our outsourced CFO and accounting services can keep you on top of your finances while freeing up your time to actually grow the business.
Learn more about how McManamon can help your small business thrive financially. Call us at 440.892.8900 or contact us online today.
Tags: accounting, financial literacy, McManamon, McManamon & Co., small business, small business finances | Posted in McManamon & Co., small business, Small business finances