Whether it is small or big, business finances call for efficient management finances; otherwise, the sole motto for which the venture has been created will be lost. Every successful business has their finances sorted in the most effective ways. Managing small business finance requires a thorough understanding of the accounting and tax elements of the business. Also, equal attention should be given to the administrative and the financial sides of the business. Only focusing on the development, sales, and marketing would leave these important sides, like administration and financial aspects neglected, that will accrue unnecessary legal complaints, tax, and undermine the business success.
Therefore, if you have just started a business and aspire to become a successful entrepreneur, you have to learn how to manage and organize your small business finance effectively. Effective management of business finances helps businesses to chase their financial goals as planned. There are many options to manage small business finances that can help in organizing the businesses’ financial goals. In this article, some foolproof tips for management of small business finances are discussed, but before that, let us throw some light on what is meant by the term “small business finance”.
What is Small Business Finance?
Small business finance refers to the way a startup company acquires money to start a new business, purchase an already existing business or an upcoming business project. There are various options for financing a small business, each having its benefits and limitations. With time the traditional ways of small business financing had decreased dramatically, and in their places, many other options of financing small businesses have emerged.
Top Financing Options for Small Business
There are two categories of financing options available today which are discussed in details below:
The traditional business financing options for small businesses include debt financing, equity financing, and government loans.
1) Debt Financing
Debt financing involves raising a loan for the business by selling debt instruments to institutional investors or individuals. It is one of the best financing options available for small ventures. Debt financing is attractive because the interest that accrues on the small business loan borrowed is a tax-deductible expense. Debt financing sources include conventional lenders like credit unions and banks. Debt financing sources may also include family and friends, micro-lenders, tech-based lenders, personal credit cards, and home equity loans.
The benefit of arranging small business finance through debt financing is that the lenders do not have the liberty to interfere in the management of the business; the owner is the sole decision taker, and his word is final. The downside of debt financing is that the repayments of a loan sometimes pressure the business, especially when it is new or has just begun to expand. The duration for availing the loan varies; traditional banks may take weeks to months to process even the smallest business loan, whereas private lenders can quickly settle the small business loan application.
Failure to pay the loan amount may lead to forfeiture of the assets that are pledged as the securities for taking the loan. Excessive debt may ultimately result in untimely bankruptcy of the venture, and therefore raising money through debt financing should be kept minimal.
2) Equity Financing
Instead of taking business loans, startups can use equity investments to run their ventures. The sources of equity financing include venture capitalists and angel investors. The main advantage of arranging funds through equity financing is that it does not have to repay the investors in the event of the venture going bankrupt or incur extreme losses.
Equity financing also has its disadvantages; by selling the company’s equities to the investors, the business sells a part of its ownership to the investors, thereby diluting his control over the business. The investors are entitled to a fixed percentage of the share of the profits. The small business owners need to inform the investors about every significant event taking place in the business. Any decision taken by the entrepreneur should go with the best interests of the investors.
3) Government loans
Governments of different countries also encourage the development of small businesses by granting loans at low rates of interest and is also one of the most reliable financing options available.
Alternate options of raising funds for small businesses include Crowdfunding and Peer-to-Peer lending. These are especially beneficial for small businesses because often they are returned by banks and other financial institutions for not having enough collateral to prove their revenues, which is very natural for a startup not to have collaterals. In those circumstances, small ventures seek alternate financing options from private lenders or angel investors, which again have their own sets of benefits and drawbacks. Below are some alternate options for raising funds for small ventures discussed.
Crowdfunding is a concept of raising funds from a large number of people and hence known as Crowdfunding. It is not a loan but a way of helping each other. Generally, social media platforms and the internet play a vital role in the concept of raising funds through Crowdfunding options. Small ventures like creative projects, medical expenses, travel, and community-based social projects largely benefit from Crowdfunding. Anyone can start a campaign in search of funding, but there is no guarantee that the campaign will be successful. Marketing your Crowdfunding campaign is very important to let the maximum number of people be aware of that particular campaign. Creating a detailed and unique pitch will attract more investors and make the campaign successful.
2) Peer-to-Peer Lending
Peer-to-Peer or P2P lending, as the name implies, is the means of lending funds to businesses or individuals through online services by matching the lenders with the borrowers. Peer-to-Peer companies provide funds at a comparatively cheaper rate of interest than traditional financial institutions like banks. P2P loans are generally unsecured loans, but sometimes secured loans are also offered by pledging luxury assets like expensive watches, fine arts, vintage cars, etc. as collaterals. The lenders set the interest rates, and the government does not guarantee the lender’s investment in the loan. The lenders mitigate the chances of bad debts, if any, by selecting the borrowers themselves to provide the loan, thereby mitigating the risks by diversifying the total investments among various borrowers.
3) Retirement Accounts/ ROBS
If you have enough money in your retirement account, you can use that as Rollover for Business Startups, and hence the name ROBS is given to this scheme. ROBS allows you to invest your retirement funds without paying income tax or any penalty for early withdrawals. It is to be remembered that ROBS is not a loan, and you are not making any debt that you have to pay interest for; it is just that you are using your funds that you have saved for your retirement plans. With the ROBS fund, you can start new ventures or a franchise, recapitalize an existing franchise, or even buy an existing franchise at your own will.
Tips to Manage Small Business Finances
Below listed are some of the top tips to manage funds of small businesses.
1) Know your business well
Knowing the business and financial affairs very well is one of the best ways to keep the cash flowing in the business. It can help the entrepreneurs avoid unforeseen debts and have enough money to invest and develop the venture project in the long run.
2) Create a budget plan
Creating a clear budget plan helps in assessing how much funds come into the business and what can be afforded. It also gives a clear picture of whether there are enough funds to pay for the expenses. There are various ways to create a budget plan like traditional spreadsheets to keep track of the incomes and expenditures of the business, or an online cloud-integrated software solution that comes with other benefits like keeping a track on the sales and inventories apart from the income and expenditures. And the best part of the cloud-integrated software solution is that you can check the status of your cash flow statement anytime while at home or while heading towards your office.
Investing in online bookkeeping and payroll solutions is a great idea to manage business finances without facing time and place barriers. It not only allows us to monitor finances carefully but also saves a lot of time and effort of the entrepreneur.
3) Separate your personal and business finances
As the doctrine of Salomon vs. Salomon & Co Ltd, which forms the basis of the Company Law, teaches us that a company is a legal entity that is separate from its members. Therefore, the creditors of an insolvent company can never sue its shareholders to pay for outstanding debts. Likewise, your personal and business finances should be kept separate. The best way to keep them separate is to entail a business credit card, and put all the related business expenses on that credit card; this will help you to keep a track on your cash outlays. Never try to make personal expenses by using your business credit card. Keeping the personal credit card and the business credit card separate will help you analyze your business’s financial performance.
4) Improving the credit score
The business credit score plays a very important role in businesses, whether big or small, and it is one of the things that often get overlooked. Having a poor credit score negatively impacts the business as it limits the options to secure a loan from banks. Also, the potential investors always keep a distance from ventures having a poor credit score. Therefore, it is very important to monitor the credit score of your ventures regularly.
5) Prioritize Cybersecurity
Prioritizing the cybersecurity factors is very important even for small businesses because small businesses are often in a myth that only big corporators fall victim to cybercrimes’ target; small ventures are also vulnerable to cybercrimes. Therefore, it is very important to pay attention to cybersecurity measures as loss of the key data can cause immense financial strain on the business. Simple measures like keeping the wifi locked, installing a firewall, or keeping a backup of important data make a lot of difference in the effective management of the projects.
6) Appoint a financial advisor
It is very wrong to think that financial advisors are only needed for big corporations; small ventures can also immensely benefit if a financial advisor is appointed for securing financing aspects of the venture. A financial advisor can put things in the right place, especially when the entrepreneur mixes up his personal and business expenses. A financial advisor can only help to bring out the entrepreneur from such complicated mazes of circumstances.
7) Outsourcing administrative tasks
Small ventures can also outsource administrative tasks like updating financial documents and invoicing, and it is helpful, especially if the administration keeps lagging repetitively. Keeping all the documents updated is one of the important ways to manage finance, and it will also help in securing business loans whenever required. If hiring an employee to keep track of these administrative tasks does not seem to be a viable option, then small business owners should consider appointing a virtual assistant for a few hours to do the administrative tasks at the end of each month.
8) Cutting down excess expenditures
During the initial stages of establishing the business, it is very important to curtail unnecessary expenses to ensure that the venture’s cash flow statement is quite impressive. For example, high traveling costs, or taking a loan for not so necessary purposes, can consume a big part of your business finance, and therefore, it should be kept minimal. Overspending on luxury traveling can prove to be disastrous for business success. Instead, planning economical trips with your fund and not on loan can assure you at least some valuable returns.
Large expenses, if inevitable like payroll, taxes, interests, rents, costs of materials, debts, and other utility bills, should be planned at least one year to lessen the business’s financial burden. It will also ensure the cash flow statement is strong even during the toughest times of the year.
9) Start investing in insurance
Most of the small business owners find paying for insurance useless, but getting under a robust insurance cover will help if you face any unforeseen events. Insurance provides you the much-needed financial security for your business, yourself, and your dependents. Study the insurance market before jumping into solutions regarding which insurance cover to buy for your business.
10) Leasing business equipment
Starting a business is challenging, and until a considerable amount of revenue starts to come in, entrepreneurs are also at a state of battling with their inner confusions. Amidst such confusion, deciding on whether to buy business equipment or lease them is very important. Leasing equipment can save a lot of the operating expenses that can be invested in other more relevant areas to improve the business.
Therefore, taking a proactive approach and having the right fund management systems in place can boost business profits and guarantee the business’s longevity. Finance serves as the backbone of every business, whether it is big or small, and therefore, it calls for proper management. Keep these tips in mind and give your venture a kickstart.