Effective money management is an important factor that contributes to the success of a small business. As a business owner, you should be mindful of your business’s finances, and know how much money the business earns against how much the company is spending. Managing your cash flow efficiently is essential to keep your business running smoothly.
We spoke with industry experts, and they shared the following 21 tips on effectively managing business money:
1. Choose the Right Business Entity to Take Advantage of Small Business Tax Breaks
Paul Jacobs, Vice President & Chief Investment Officer, Palisades Hudson Financial Group
A new 20 percent qualified business income deduction lets certain business owners take a 20 percent deduction against their 2018 income. Taxpayers who own or have an ownership stake in a pass-through business entity such as a partnership, limited liability company (LLC) or S corporation are eligible. Take advantage of this tax break by choosing the right form of business.
2. Create a Business Budget Forecast
Dave Ramsey, CEO & Founder, Ramsey Solutions
The very first thing you should do is to create a budget. A business budget forecasts income versus the necessary expenses. Creating a budget in a brand-new endeavor for the first time will likely be an educated guess, so it doesn’t necessarily have to be accurate. However, the longer you run your business, the more precise your projections will become.
3. Get a Personal Financial Management App
Michael Bates, Vice President of Product Management, MX
Ask your bank if they offer a personal financial management (PFM) app for free. A PFM app not only allows you to budget your small business, it can also be prescriptive — giving you suggestions like how to improve your small business’s financials. Having a PFM app is like having your own financial advisor, giving you advice that normally only big businesses can afford to get.
4. Get a Business Line of Credit Instead of a Business Loan
Nathan Abdi, President, Excel Capital Management
It’s essential to understand the natural cash flow of your business and how much loan your cash flow can support. Taking a business loan without understanding this will just put your business in a financially stressful situation. If you want to have a safety net in case of an emergency, take a business line of credit instead of a loan. This way you only use what you need, and only pay for what you use.
Check out our review of 2018’s best small business line of credit providers.
5. Separate Finances Personal from Business Finances
Jay DesMarteau, Head of Regional Commercial Specialty Segments, TD Bank
To track revenue streams properly, it’s imperative to keep any personal finances separate from those of the business. Using the same bank account or credit card for both personal and business finances can cause major issues for the business. Muddling finances can cause small business owners to miss key insights about their business or make it easier to borrow money from the business to pay for personal needs.
6. Control Your Inventory
Andy Curry, Owner, AndyCurry.com
One effective money management tip is to control your company’s inventory relentlessly. Make sure to manage your inventory levels — do not store too much inventory because they can become idle assets. However, also ensure that you have enough on hand to service your customers’ demands. This strategy will help increase your operating profit and manage your cash flow. It’s essential to pay attention to how your inventory is managed.
For more information, read our ultimate guide to inventory management.
7. Manage Inventory Efficiently Using Inventory Software
Robert Lockard, Copywriter, Fishbowl
You can keep a healthy cash flow by using inventory software to manage inventory well. This allows you to set minimum and maximum levels so you don’t get over or understocked. A healthy inventory level allows you to have sufficient stocks on hand to service customers. As a result, you can effectively sell your stock, prevent assets from becoming idle and have enough cash flow for other operating expenses.
8. Automate Your Accounts Receivables Process
Jon Jacobson, Founder & President, Late Fee Manager
Dealing with accounts receivable can be frustrating, especially if you’re continually running into issues with customers taking far too long to pay. Automation of the accounts receivables process can help solve this issue and also save you time. You should also implement a late fee policy to your clients to help incentivize payment and increase your cash flow.
9. Keep All Documents & Receipts
Angela Murray, CEO, Soul Synchrony, LLC
Staying organized is an efficient money management tip for every business owner. It’s easier to keep track of your finances if you keep receipts and related documents in an organized manner. You can also use an app that allows you to upload a picture of your receipt, so you can monitor where the money is going. This helps identify any overspending habit and possible areas for savings. It also makes tax filing so much easier.
10. Know Your Business’ Spend Culture
Aman Mann, CEO & Co-founder, Procurify
Spend culture is a set of shared beliefs and practices that inform a person how, why and when money should be spent. It’s important to understand your organization’s spend culture to make more responsible decisions when it comes to company expenditures. Understanding your spend culture and how it affects the people in your organization will influence how much value you get out of your spending.
11. Don’t Take on Too Much Debt
Leslie H. Tayne, Esq., Founder & Managing Director, Tayne Law Group, P.C.
Almost every business owner needs to take on some form of debt in order to start and run their business. However, it’s crucial to be cautious of how much you borrow and the stipulations that come along with it. Taking on heavy, high-interest debt can cripple a new business easily. Don’t take on more debt than absolutely necessary. Ensure to establish a repayment plan in advance.
12. Manage Your Business Credit Card Usage Properly
Kurt Heckman, President, vCalc
Business credit cards are a useful tool to help with temporary cash flow gaps. However, business owners should know how to manage their credit card usage and only charge what they can afford to pay on the due date. If it takes too long to pay off the credit card before the next cycle, it can create an additional cost because you‘ll need to pay finance charges, leading to unnecessary money losses on your business.
Find low rates, generous rewards and introductory bonuses in our business credit card guide.
13. Pay Your Debts on Time
Judy Hackett, President of Credibility, Dun & Bradstreet
Paying your debts on time will save you from additional cost on late payment charges, and it will also help you build good relationships with your vendors. More importantly, it will enable you to build a good business credit. Having a strong business credit file may help you access financing to grow your business and may improve your chances of negotiating better payment terms with your vendors.
14. Always Plan for Major Expenses in Advance
Paola Garcia, Small Business Advisor, Excelsior Growth
Having a plan for major purchases like equipment or other fixed assets can help you keep expenses manageable. Create a list of expenses and factor these in when driving your sales for the next months. These expenses tend to be larger, so aside from more revenue, you’ll also usually need external financing, which frequently requires advanced planning on your part. Planning at least three to six months in advance of your actual needs will help you manage your finances effectively.
15. Have a Sufficient Contingency Cash Reserve
Ryan Krueger, Co-founder, Krueger & Catalano
Having sufficient and liquid cash reserves is important in case of unexpected financial needs. Make sure to have more than enough cash that’s completely uninvested. You’ll never know when you might need cash for unplanned circumstances. It’s best to be ready than having to take on debts or sell your investments before they’ve earned profits.
16. Have an Opportunity Fund
Acey Gaspard, Founder, A Touch of Business
Starting an opportunity fund is a great way to ensure you don’t miss out on certain opportunities like inventory deals, equipment sales, an option for a better location and more. Opportunities are always all around you, but you often miss grabbing up most of them because the money isn’t there. Take a percentage of your daily sales and put it into a secure savings account that you can’t access easily.
17. Don’t Rely Too Much on Your Bookkeeper
Crystal Stranger, Co-founder, PeaCounts
Some business owners try to hand everything over to a bookkeeper. Your business’s numbers can give you a lot of insight into your business finances, which is critical for your company’s growth. Do not rely too much on your bookkeeper. Even if you have a reliable bookkeeper, you should still be familiar with your own numbers as this is necessary to manage your cash efficiently.
Brush up on the basics with our beginner’s guide to bookkeeping and accounting.
18. Prepare & Maintain a 12-month Rolling Cash Flow Forecast
Anne MacRae, Vice President of Business Development, Express Business Funding
To manage your business’s finances efficiently, it’s essential to produce a realistic, detailed cash flow forecast for at least 12 months and update it monthly or weekly. Identify potential cash flow crunches and plan accordingly. Keeping on top of your cash flow allows you to prepare for seasonal spikes, take advantage of sudden opportunities and manage through slow periods.
19. Monitor & Measure Financial Performance from Previous Ones
Andrew Cravenho, CEO, CBAC
As a business owner, it’s crucial for you to monitor the movement of your money, whether the amount involved is small or big. Make sure to keep track of your company’s financial performance and compare it with the past financial statements. This is a great way to project your future income, expenses and cash flow.
20. Grow Your Profits
Craig Bolanos, Founding Partner & CEO, Wealth Management Group
It’s important to know how to maximize your earned profits once they’re banked. A significant portion of your liquid assets stored in a bank savings or checking account isn’t a viable long-term strategy. There are different investment products available to meet your specific short- and long-term financial objectives. Learn about the various investment vehicles like stocks, bonds and mutual funds as well as CDs and money markets to help grow your business profits passively.
21. Diversify Your Investments
Tracy Shaw, Head of Business & Market Development, MassMutual
Many small business owners have no assets for retirement outside of the business. Do not put all your eggs in one basket as there are many ways to create income sources outside of the value of your business. One of the easiest ways is to create opportunities through your business with a qualified retirement savings plan and, potentially, an executive benefits program.
To learn more, read our guide to common retirement plans for small business owners.
The Bottom Line
Managing your business’s finances is an important key toward its success. Both new and existing business owners should keep an eye on their business’s financial health to ensure that their company maintains a healthy cash flow and net operating income. Use the above expert money management tips to ensure you are on the right track.