Manage startup finances: As you get started running your business, people from all over are going to try and offer you advice on how to succeed. This is great. You should always have your ears open and be ready to learn.
But while absorbing all of these tips and tricks—which may at times contradict one another—make sure to always keep one thing in mind: manage your finances.
The vast majority of small businesses that fail do so because of improper cash flow management. They lose track of how much is coming in and how much is going out, and before they know it, they’re either up to their eyeballs in debt or unable to pay their bills.
So, one of the smartest things you can do when first starting out with your business is to learn some good financial management skills. Some of this will come as you go, but here are the core ones you should fully understand before you get too far along in the life of your company.
Understand Accounts Payable and Accounts Receivable
This is a fundamental accounting concept that is relatively easy to understand but that many novice entrepreneurs overlook.
Unlike in our day-to-day lives—where most transactions take place instantly—a lot of the B2B world works on short term credit. You provide a service to people, and then you send them a bill, and vice versa. Few people pay in cash up front. It’s just the way things are done.
So, for you, this means that all the money you currently have is not yours, but that you also don’t have all the money that is technically yours.
This sounds confusing, so let’s put it into more practical terms. Say that you hire a marketing firm to help you with a product launch. They may produce a bunch of content for you and provide some consulting services, and they’ve agreed to do this for a fee of $3,000. They may not try to collect at the moment they provide the service, choosing instead to bill you.
This means that when you look at your cash situation, you’re going to have $3,000 more than what you actually do. It’s in the account, but it’s owed to someone else, so make sure not to spend it.
Accounts receivable works in the opposite direction. It’s the money you expect to come in as a result of the work you’ve done.
In sum, to figure out how much money you actually have, you need to add the amount in accounts receivable to the amount of cash you currently have, and then subtract whatever you have for accounts payable. What’s left is yours, and you can do with it as you wish.
A lot of small businesses, though, don’t do this, and then when invoices come due, they don’t have the cash on hand to pay them, and this can put your business in jeopardy. This is why it’s important for new businesses to invest in reliable small-business accounting software.
Follow Up and Pay on Time
Building on this, it’s important that you do two things as a business owner:
- Pay your invoices as soon as you can. This prevents accounts payable from getting too large.
- Follow up and make sure you’re paid on time. The approach outlined above only works if your customers pay on time. If they don’t, then your cash on hand situation is going to get complicated. Should you repeatedly have trouble collecting from a customer, then you may want to consider ceasing the relationship.
Distinguish Between Income and Non-Income Producing Activities
In business, it takes money to make money. You need to spend in order to earn. It’s simply unavoidable.
However, not all the money you spend contributes directly to the profitability of your business, even if it’s necessary to make the business run. These expenses are non-income producing, and they include:
- Rent/office space
- Electricity/heat/AC
- Internet
- Office supplies and equipment
- Software
- Employee benefits/perks
There are many more, but you get the gist. You need these things, but they don’t help your business earn more money, at least not in a direct way.
As a result, you need to get in the habit of constantly auditing these aspects of your business to look for savings.
For example, you may be able to relocate your office and save on rent, or maybe you can transition some of your employees into remote roles so that you don’t need to pay for as much space.
Saving on utilities is huge, too. Look for competitive electric companies, and search for broadband internet providers that may be able to offer you better value.
Income Producing Activities
Some parts of the business, though, cost you money but make it back. This includes:
- Marketing and advertising
- Promotions
- Referral programs
Spending money on these activities isn’t so bad because they help your business grow. As a result, instead of looking for ways to cut back, you should be looking for ways to optimize.
Ask yourself how you can get more from your marketing efforts without having to increase expenditures?
Sometimes it can be as simply as shifting your focus, whereas other times you may need to invest in tools, such as an automated CRM platform, to help you maximize the return you get from these income-producing activities.
Automate and Hire Professionals
If you don’t come from an accounting background, then your best bet is going to be to bring in some professional help.
What we’ve outlined here are the basics, which will help you understand what’s going on and how to make smart decisions. However, things will soon get more complicated. So, to save you from getting in trouble, consider bringing in some help.
If you’re looking for budget options, then consider investing in an automated accounting suite such as QuickBooks or Xero.
Or, you could hire a professional accountant to come in and help. They may automate some part of your accounting function, such as payroll, but they will also help you make strategic decisions and understand the numbers.
But no matter which route you take, know that you’ll be minimizing the risk of error, which will help ensure the financial health of your company.
Always Be Vigilant
Good financial management never ends. It’s important to get these basics down in the beginning, but then always be on the lookout for how you can improve. After all, a healthy business is not only a better business, but it’s also more profitable and more rewarding to run.
