Small business owners are notorious for single-handedly juggling the many different aspects of running a business. But when it comes to financial management, many (too many really) small business owners have got their heads in the sand. While taking the reigns in your business’ financial management may be one hat you’d rather not wear, you may want to think again. According to a recent study conducted by the Federal Reserve Banks of Chicago and San Francisco, Pepperdine University, and online lending resource FundWell, a business owner’s level of financial management, planning, and knowledge is directly related to the company’s financial health, and ultimately, its ability to successfully operate and grow.
In the study entitled, Small Business Financial Health Analysis, over 900 businesses with sales under $5 million were asked about their knowledge of financial products, the credit experience of business owners, and their financial management and planning practices. Two of the survey’s findings are particularly important to the majority of the nation’s smallest businesses:
- Small business owners who had a better understanding of asset-based financing, including inventory financing, accounts receivable financing, trade credit, and equipment leasing financing, scored higher on the financial health index.
- Better financial planning and management directly contribute to a higher financial health score. Financial management practices include creating a budget, having available credit, employing more than five full-time staff, and establishing a separate bank account for payroll.
Though it may seem a bit counter-intuitive at first, the smaller the business and the lower its yearly revenue, the greater the need for sound financial management, planning, and knowledge. According to the survey, “88 percent and 70 percent of poor and below-average financial health businesses have revenues under $1 million, with 40 percent of all poor financial health businesses at less than $100,000 in annual revenues.”
What’s the correlation? This has partly to do with the fact that these businesses have fewer assets to draw on. This means any available credit, such as credit cards, will be more fully used up, and the owners will be more likely to rely on personal assets as well as personal credit to help fund their business. Both of these factors combined with lower revenues will negatively affect their credit scores and make any outside financing, even from alternative lenders, less likely or at least, less affordable.
This can lead a business down a vicious cycle of taking out multiple short-term financing products at extremely high rates in order to cover a sudden cash shortfall or to provide a necessary influx of additional capital to purchase inventory, equipment, or make renovations.
So what can you do if you are a number-phobic small business owner? The truth is—a lot.
First of all, you owe it to yourself and your business to gain some basic understanding of financial management. Depending on your location and circumstances, you could do this by looking for local free or low-cost workshops hosted by community development organizations or small business development centers; you could purchase an inexpensive book on business financial management, or even seek out a free online business finance course.
The second part of this process is to start keeping track of your business’ financial health and standing and using that knowledge to make both sound business policies and decisions. Luckily, this does not have to be an overwhelming activity. Here are four simple things that you can do to put your financial management into high gear:
- Get accounting software. There are many accounting platforms out there that can automate the process of recording financial transactions, conducting financial reporting, payroll management, and billing—all of which will help you to stay on top of your cash flow.
- Create a monthly cash flow report. A cash flow report is specifically designed to give you a clear snapshot of each component of your business and how it affects your cash flow so that you can project (and properly react to) an upcoming cash shortage.
- Take a little money out each month. Commit yourself to taking out a small portion of your monthly sales and putting it into an emergency fund. You can do this by setting up a payroll deduction or having withdrawals automatically sent to a designated savings account. Another possible option is to send either all or a significant portion of your tax return to your emergency fund.
- Create a system to handle a cash shortfall. You should create an “early alert” system that will tell you when additional working capital should be brought in to cushion cash flow fluctuations or to take advantage of profitable opportunities. This means maintaining a list of short-term small business financing options that you can turn to in times of need.
With a little effort and know how, good financial management does not have to be so scary or overwhelming. Don’t let your fear of numbers be the monster under your bed that keeps you from running your business successfully.
This article was written by Susan Brown from Business2Community and was legally licensed through the NewsCred publisher network.