5 financial fundamentals for running a business
When you run your small business, you have a lot on your plate. That makes it tempting to let some tasks slide, especially tasks that are related to finances, which can be challenging and often outside your preferred skill set or experience.
The team at Affinity Accounting have narrowed down 5 fundamentals for managing your business finances, so you can have the best chances of success.
Pay yourself
As a small business owner you may be tempted to keep putting every cent you earn back into your small business, but it’s important to compensate yourself as well. You need to pay your own bills and be financially sound personally. You’ll also need to have money set aside for your retirement.
Make sure you draw a regular income from your business that you use to take care of your personal expenses.
2. Have a separate business bank account
Keeping your business and personal finances together makes it more difficult to track how your business is doing, and how you’re doing. When you have separate bank accounts for your business and personal finances you can more easily monitor where and how you’re spending money. Finally, it makes things easier to track for tax purposes.
Have separate accounts for your business and for your personal finances and deposit your salary (see the above tip) into your personal account.
3. Have a good billing strategy
When you own a business you’ll deal with clients who are slow to pay their bills. Money your clients owe you isn’t accessible to you until it’s in your bank account. Monitor your invoicing system to see which clients pay you on time and who takes their time paying your invoices. If you have too much money tied up in unpaid invoices, you may need to adjust your payment policies.
Consider charging interest on late payments or giving more strict terms. Or you could offer a slight discount if they pay within 10 days of invoicing. See if you can charge a deposit for your goods or services so you still have some cash flow while waiting for clients to pay the remainder.
Remember to invoice immediately, use invoice reminders where possible and follow up promptly if they miss the payment deadline, so you aren’t stuck waiting for payment. If your clients are large companies with their own payment terms, find out what those are and be mindful of them when billing.
4. Keep your receipts
Now that there are digital platforms for managing the financial aspects of your business, you don’t have to have physical receipts taking up space in your office. Instead, you can go paperless, and keep all your receipts digitally.
Make sure you keep receipts, pay records and other financial documents for 7 years. If you do still use paper receipts, make sure you have a way of storing them so they’re easy to manage and find when you need them.
5. Have a budget
Your budget is your plan for success. It shows how much money you expect to bring in and how much you might spend in a given period. You can anticipate times when your profits may be higher and times when you may have a surge in your expenses. Additionally, bankers, investors, and other stakeholders may ask for a budget when they consider financing your business.
What’s next?
There are other strategies that can help you run your business and set yourself up for financial success. Those include automating your bill payments, having a cash flow statement, and choosing the right business structure for you. But as a place to start, creating a budget, keeping your receipts, adjusting your billing strategy and drawing a salary that you keep in a separate bank account are important first steps.
Want to learn more about how we can help you stay on top of your finances? Contact us today to learn more.
Affinity Accounting is a Wellington accounting, tax and advisory firm serving clients across New Zealand.