According to research, 60% of small business owners need more accounting and finance knowledge. It's an alarming statistic because if you do not know how to manage your money effectively, how can you ensure the 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 harm the business's survival. Firstly, many business owners need help keeping their business and personal finances separate and trying to save on expenses by handling the accounting function alone rather than hiring a professional accountant. As a result, they need to keep track of their payments and receivables effectively, resulting in delayed payments. Incorrect recording of financial data and inaccurate calculations are also too familiar in small businesses unless there's a professional doing the job.

It is no surprise,, that so many small businesses with 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% cannot surpass the ten-year mark.

The business's financial well-being 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 to achieve economic stability:

Draw a line between business and personal expenses.

Many 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.

With a separate account, it is possible to monitor the business's cash flow and know whether it can keep up with its expenses and payments. You need to understand when the business is running low on cash, which might result in serious cash flow problems.

Furthermore, maintaining a separate account raises an immediate red flag for any third party examining the business's finances, whether it is a lender, potential partner, tax consultant, or auditor. There's more reason to doubt the reported figures when the business applies unprofessional practices.

Learn to work with a budget.

According to a Clutch survey, on average, 61% of small businesses still needed to create a formal budget for 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.

These figures are eye-opening proof that many small businesses need to realize the importance 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. 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 the 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 expense limit, making overspending difficult.
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 spread in smaller businesses, with cash shortfalls being expected. When securing favorable credit terms from their suppliers, smaller companies need help due to their smaller purchase volumes and the risks associated with granting credit to a smaller business.

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

So, how can smaller businesses manage late payments?

  • The quicker, the better – The faster you send invoices, the sooner you get paid. Schedule a day every week to follow up on your receivables and stick to it, or if you can afford it, invest in an electronic invoicing system that 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 on time, as late payments result in extra charges and fees and damage your business' reputation.

Manage your debt and credit score.

According to research, 45% of small business owners need to be aware that their business has a credit score, which is surprising because many small businesses operate with a loan.

To successfully manage the business's finances, the owner must know the available financing options and their impact. Such information can be beneficial, especially in emergencies where the business needs an immediate influx of cash.

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 the business situation, 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 can be challenging for small businesses to generate significant revenues initially, and a low-cost base can make a difference.

Overheads constitute a significant area where there is 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, running a small business is a challenge in itself. If you are a small business owner, you are caught up in handling so many business functions by yourself that finance takes a backseat. However, improper financial management without a professional puts your business at severe risk. Start working on your finance strategy today, and you will surely see positive results.