In order for your business to succeed, you must have a thorough understanding of the financial side of things. While marketing, branding, and business strategies are crucial parts of a successful business, the numbers are truly the defining factor. Your business’ financial performance represents how successful your company is and will be in the future.
While managing a business’ finances may seem daunting, there are many age-old rules, tips, and tricks that you can apply when running your company. Keep reading to learn about five business finance rules that your business should be following.
1. Track Actual Cash Flow
To have a solid idea of where your company stands financially, you will want to track actual cash flow. To do this, you can use a simple spreadsheet that monitors and tracks incoming and outgoing cash flow. This allows you to have an up-to-date picture of the money you have available.
Tracking actual cash flow is also important when determining how much money your business is making each month. By having a thorough understanding of the amount of cash flow you have each month, you can better determine how, when, and what to put that money towards.
As your business grows, it may become impossible to track cash flow using just a spreadsheet. You will want to invest in an automated accounting tool that creates reports, business invoices, and financial projections. From there the tool will do the heavy lifting for you to ensure your numbers and projections are correct.
2. Create a Budget
There are many tools and financial principals that a business must follow in order to succeed. One of the most important tasks to tackle as a business owner is to set a budget as soon as possible. Without an accurate budget, you risk making long-term financial decisions that could impact your company’s success in the future.
When creating a budget for your company:
- Determine all income sources
- Pinpoint fixed costs and variable expenses
- Predict one-time expenses
Once you’ve determined income sources and expenses, you can create a projected budget of how much money will be coming into the business versus what will be going out. This will give you a detailed picture of your company’s financial health so that you can make the best financial decisions.
3. Avoid Too Much Debt
Unless you have the money needed to fund your startup, you’ll need to borrow money to ensure you have access to the funds you need to purchase IT equipment, for marketing, and much more. While business loans aren’t uncommon, one mistake that many companies make is going into too much debt too soon.
Before applying for a business loan, take the time to figure out what you actually need to finance your business. You don’t want to over or under borrow, just as you don’t want to borrow money that you can’t pay back within the loan term.
Remember, loans must be repaid. There’s nothing worse than starting up a business, only to be in over your head in debt that only continues to grow. Before applying for financing, write down your startup expenses and figure out the best way to finance each expense.
4. Have an Emergency Fund
Just as you should have an emergency fund for personal finances, you should also have one for business purposes as well. Unexpected business expenses can happen at any time. By having an emergency business fund, you can have the peace of mind that you can pay for any unexpected expenses that may come your way. From payroll to rent to IT equipment costs, having an emergency fund makes it much easier to get through moments when cash flow is tight.
Startups and small businesses may find it hard to create an emergency fund, especially when cash flow and monthly income are low. However, setting aside just a few dollars each week is better than not saving at all. Start small and as your company’s income increases, you’ll want to increase the amount of money that goes into the emergency fund.
5. Keep Personal & Business Accounts Separate
While it may seem easier to manage your personal and business expenses using the same account, mixing two different pots of money is the perfect recipe for tax-headaches and unexplained losses. Never mix personal and business cash flow or expenses.
As a business owner, research the banking institutions in your area and choose the one the best fits your needs. With a separate business account, you can keep close track on business expenses and also have a clear understanding of where you stand financially.
Unless you’re an accountant, dealing with business numbers can be quite overwhelming. Thankfully business finance rules aren’t much different from the traditional rules you’ve likely already practiced in your personal life. Be sure to follow these five rules to keep your business on track and in the positive.