According to a research, 60% of small business owners believe that they lack knowledge about accounting and finance related matters. It’s an alarming statistic, because if you do not know how to manage your money effectively, how can you ensure well-being of your business and prevent it from running into a financial catastrophe?

Due to a lack of knowledge, financial mistakes in small businesses are common, some of which can be detrimental to the survival of the business. Firstly, many business owners fail to keep their business and personal finances separate and try to save on expenses by handling the accounting function by themselves, rather than hiring a professional accountant for the job. As a result, they fail to effectively keep track of their payments and receivables, resulting in delayed payments. Incorrect recording of financial data and inaccurate calculations are also too common in small businesses, unless there’s a professional doing the job.

It is no surprise then that so many small businesses that have great potential fail just because they can’t manage their finances. According to BusinessInsider, only half of all small businesses survive past their first five years while 70% are unable to go past the ten-year mark.

Financial well-being of the business is vital for its overall success and sound financial management can only be achieved through an effective finance strategy. In this article, we discuss five finance strategies a small business must follow in order to achieve financial stability:

Draw a line between business and personal expenses

A lot of small business owners, particularly sole proprietors, consider opening a separate bank account for their business a hassle. They think they are only operating on a small scale for now, so there’s no need for a separate account. However, this is where they are wrong.

Without a separate account, it is impossible to monitor the cash flow of the business and know whether it is able to keep up with its expenses and payments. You do not know when the business is running low on cash and this might result in serious cash flow problems.

Furthermore, failure to maintain a separate account raises an immediate red flag for any third party examining the finances of the business, whether it is a lender, potential partner, tax consultant or auditor. There’s more reason to doubt the figures being reported when you have unprofessional practices such as these being applied by the business.

Learn to work with a budget

According to a Clutch survey, on an average 61% of small businesses failed to create a formal budget for the year 2018. Smaller businesses, i.e. those that operate with 1-10 employees had the most alarming statistics whereby 74% of those surveyed did not have a budget at all.

These figures are an eye-opening proof that many small businesses do not realize the important of budgeting as a tool for managing their finances. Budgeting can help them in the following ways:

  • Helps plan for the future – with a budget, there is a clear plan for where the business is headed in the future. There is a sense of direction both for the owner and employees.
  • Identifies problems before they arise – budgets help identify any financial dips the business is likely to face in future such as the possibility of cash shortfalls, allowing the business to plan ahead on how to deal with them.
  • Keeps spending under control – budgets set an acceptable limit on expenses, making it difficult to overspend.
With a budget, a small business can be better prepared for the future, reducing the likelihood of unpleasant surprises.

Be proactive in managing receivables and payables

Cash flow problems are very common in smaller businesses, with cash shortfalls being a common occurrence. When it comes to securing favorable credit terms from their own suppliers, smaller businesses tend to struggle due to their smaller purchase volumes and the risks associated with granting credit to a smaller business.

On the other hand, in order to stay competitive, they have no choice but to offer attractive credit terms to their own customers, even though late payments put significant pressure on their cash flows.

So, how can smaller businesses manage late payments?

  • Quicker the better – The quicker you send invoices the sooner you are likely to get paid. Schedule a day every week for following up on your receivables and stick to it, or if you can afford it, invest in an electronic invoicing system which automatically sends out invoices and reminders on set dates.
  • Shorten your credit period – as a small business, you do not have to offer long periods of 30-60 days. Two weeks is sufficient time to give your customers to pay.
  • Try invoice factoring – If you are still having trouble, consider invoice factoring – a loan against your receivables whereby you can get up to 80% of the amount immediately and the rest, minus the lender’s fee, once the customer pays.
  • Pay bills on time – Make sure to pay your own bills on time as late payments result in extra charges and fee and damage your business’ reputation.

Manage your debt and credit score

According to a research, 45% of small business owners are not aware that their business has a credit score, which is surprising because so many small businesses operate with some kind of a loan.

In order to successfully manage the business’ finances, the owner must be aware of the different available financing options and the impact they have. Especially in emergency situations where the business needs an immediate influx of cash, such information can prove to be very useful.

Steps should be taken to maintain a good credit rating by keeping your credit within limits and always making payments on time.

Find ways to minimize costs where possible

No matter what the situation of the business is, it always helps when your costs are kept at their minimum. If you are doing well in terms of revenue, low costs help increase profits. On the other hand, when business is slow, a low-cost base helps minimize losses.

Especially with the competitive nature of the marketplace today, it is not always easy for small businesses to generate significant revenues in the beginning and a low-cost base can really make a difference.

Overheads are a major area where there is a room for cost-cutting. Just starting your business? Start from home so you can avoid rent and utility bills. High staff costs? Work with a minimum number of permanent staff and hire freelancers for projects.

To sum up, we have to admit that running a small business is a challenge in itself. If you are a small business owner, you are probably so caught up in handling so many of your business’ functions all by yourself that finance begins to take a backseat. However, improper financial management in the absence of a professional, you are putting your business at a serious risk. Start working on your finance strategy today and you are sure to see positive results.