According to the U.S. Small Business Administration (SBA), there were a total of 30.2 million small businesses and 58.9 million small business employees in the U.S. in 2015. Considering small businesses outnumber corporations in America, it’s clear to see how small businesses make a big impact on employment and the economy.
Just like the community is thankful for and supportive of small businesses, small business owners to feel grateful for the opportunity to be able to serve the community. Even for small businesses that are not heavily profitable, owning a business can be incredibly rewarding emotionally.
However, there’s something that drastically affects whether or not a small business can succeed in the long-run: finances. Whether you have a small business or are hoping to start one soon, the following financial tips will help you succeed in business in the long term.
1. Keep track of all expenses.
While it seems common sense for any business owner, it’s still vital to reiterate the importance of keeping tracking of every financial move you make. Recording your business’ expenses not only comes in handy when it comes time to pay taxes, but it also helps make it clear what your operating expense ratio is.
Your operating expense can be found by dividing your expenses by the net revenue your business brings in, which would then be multiplied by 100. An operating expense ratio of 80 is considered financially ideal.
2. Separate your personal and business finances.
Although many like to consider their work and personal life one component, there are many reasons why a proper work-life balance is important. After all, you are not your business, and your business is not you. Your business, however, should of course still be a part of your life.
Financially, your business should be separate from your personal life. This doesn’t mean that you can’t spend what you make. Rather, this implies that, especially if you have another source of income, it is vital to have a separate business bank account to store your business’ profit. Likewise, opting for a business credit card is a good idea too.
Having a separate business bank account and credit card not only makes things easier when it comes to tax time, but tracking profit and expenses is also easier.
3. Only buy what you can afford.
Just like in your personal life, it’s important to not overspend on things you can’t afford at the time. In business, spending more than what you can afford for equipment, supplies, and the like may not just lead to long-term debt but potential bankruptcy and/or business closure.
The idea of “buying what you can afford” doesn’t just refer to being able to pay out of pocket for things you need but also being able to upkeep repayments on loans and credit card expenses.
4. Lease equipment and machinery.
Especially for newer businesses, paying for equipment and machinery, and not to mention the other expenses that come with opening a business, can add up quickly. Although you might be able to get a loan to help you pay for these things, it’s still a good idea to cut costs when and where you can.
Leasing or purchasing used equipment and machinery can easily help you save hundreds if not thousands of dollars. Being able to reduce the debt your business builds up early on can ease your startup jitters and hopefully get you on the right foot financially for your business.
5. Create a business emergency fund.
The point of an emergency fund is to ensure you’re financially cared for in times where unexpected expenses arise. These can certainly come in hand, which is why financial experts stress that everyone has a personal emergency fund.
However, an emergency fund is also vital for small businesses too. The majority of businesses have an off-season. For instance, jewelers might sell more product around Christmas and Valentine’s Day whereas a tomato farmer would make their profit in the late spring through early autumn months.
Putting money aside in an emergency fund for unexpected business expenses is wise as your income as a small business owner will be irregular and may even dip at random. Likewise, expenses may arise out of the blue: machine repair, equipment replacement, health department fines, and so on.
6. Keep frugal with your spending.
Nobody wants to be told how to spend their money, especially since they are the ones making their own cash. However, as a small business owner, especially in the early stages, it is vital to be a frugal spender.
Frugality is vital not just with how you spend money within your business but also with how you spend money in your personal life. Because starting and operating a small business can be costly, cutting some of the unnecessary and luxurious expenses out of your life can help when you need extra cash to run your business.
7. Don’t expand your business too quickly.
One of the biggest reasons a business fails is rapid expansion. Even if you and your business are ready for expansion, there is still such a thing as too much expansion. For instance, a successful restaurant may go from one location to three locations in a year, only to find that the other two locations were impulsive decisions.
Although you might have the funds and be eager to expand your business considering the many opportunities, expansion should be a careful decision. Not only should you be financially prepared for this expansion, but you should also consider what risks the expansion may hold and whether or not you and your business are ready for that.
8. Connect with a financial advisor.
Keeping a business’ finances thriving is not always an easy task. However, because finances are no laughing matter as they have the power to predict the lasting success of your business, it’s critical that you take your business’ finances seriously.
Fortunately, you don’t have to do it alone. Get in touch with an Equify Financial advisor for help regarding your business’ finances.
In order to have a thriving small business, proper finances must be in order. Taking charge of your finances as a small business owner is vital for two main reasons. For one, managing your business finances properly better ensures you can stay in business. Secondly, it can better ensure you’re financially cared for in your personal life.
Although managing the finances for a small business may be hectic at times, the long-term benefits are certainly worth the extra work and effort.