11 Tips on How to Manage Business Finances

Tom
Tom May 2022 Content Creator 14 min

Table of contents

It’s a difficult truth that the majority of startups don’t become successful in the long term. Data from corporate innovators Stryber shows that, in Europe, an alarming 89% startups founded in 2013 are failures

This high percentage of startup failure makes it clear that many things can go wrong when running a business. Growth and stability are not the result of one thing done right, but the cumulative result of intelligent business management. Understanding how to manage business finances properly is a huge factor in the prolonged success of your startup or small business. 

It’s our job to steer you away from that percentage. Below we’ve compiled eleven of the best finance management strategies to help you better understand how to manage business finances before and during your business venture. 

How to manage business finances in a nutshell

  • Choose between the owner’s draw and salary method of paying yourself
  • Investing in your company’s growth demonstrates confidence in your venture
  • Make sure you understand the return on investments and expenditures
  • Simplify and optimise your payroll process with new software 
  • Accept that you will need to take out loans and learn which is the best for you
  • Maintain good business credit so that future loans are not difficult to obtain
  • Automate your billing strategy and communicate it with clientele
  • Manage your accounting by frequently checking your books 
  • Create a detailed cash flow statement for a clear picture of your business’s financial situation
  • Equity financing and debt financing both have crucial advantages and drawbacks

11 tips on how to manage business finances

The below tips are designed to help you keep on top of your finances when running a business. Both periods of growth and stagnation will occur when running a business, and each can be as much of a threat to your financial management as the other. The important thing is to plan ahead, keep a consistent eye on your books and manage your bills.

Read on and take steps towards good financial management. 

Pay yourself

An investor’s mentality that assists with savings over time, pay yourself is useful advice for business owners. Putting it into action means investing long-term for retirement and other personal expenses that prioritise your wellbeing. 

To practice paying yourself as a business owner, you can adopt one of two methods: salary  and owner’s draw.

Using the salary method, you as the owner of your business will pay yourself a salary in the same way you would pay staff. This money is yours to spend on things other than your business expenses. Using this method, the amount you pay yourself is fixed. It’s about ensuring that you receive a steady wage of your own instead of basing your personal income entirely on the success of your business.

If you don’t feel comfortable with your business’s financial state to pay yourself a fixed wage, the owner’s draw method is a viable alternative. How much you pay yourself month to month using this method depends on the profits of the business. This works to keep your payments in check with the reality of your business’s financial situation.

Invest in your growth

Investing in the growth of your business means investing in the future you hope to see for yourself and your venture. Alongside whatever monthly payments you put aside for yourself, invest what you can into future plans for your business. 

These plans can be for expansion of the business into new areas, increases in staff, new feature roll-outs, projected earnings—anything you would consider growth in relation to your business. Investing demonstrates your willingness to involve yourself in your business.

Investing in your growth also communicates to your clientele and staff that you believe in your product or service and have made active moves towards its future as a stronger and more profitable venture. 

Focus on expenditures and ROI

Keeping track of your expenditures and ROI is about tracking your spending campaigns and assessing what is working. Are you seeing increased traffic or conversions on your latest TV ad campaign? Are the paid ads on social media giving you the response you’d planned for? Only once you’ve worked out the returns you need based on how much you’re spending, can you budget properly.  

Make sure you divide business and personal expenditures accurately. For instance, some expenses like office supplies, staff wages, or resources directly related to the product or service you are providing can easily be lodged entirely as business expenditures. However, if you buy a car for both work and personal use, things become slightly more complicated. You should then always lodge what you pay for fuel as a business expense only when it is directly related to work. The same may be true of a new laptop—how much will you use it for work and how much for personal use?

Optimise your payroll process

Optimising payroll can be hugely beneficial for any business, but it takes a bit of work to do it well. It’s about more than just buying new software or making a few changes. Sometimes, your payroll system may require an overhaul.

Here are a few things you can do to optimise your payroll process:

Upgrade payroll software and go paperless

It could be that the software you use is outdated, poorly designed, or not suited to your business’s specific needs. While it may cost more to upgrade or install and begin using an entirely new program, this is likely to be a useful investment. 

With your new software, you should also be able to go entirely paperless. Keeping track of time cards can be a stressful and time-consuming way of handling payroll. Go paperless and save yourself the trouble of losing or damaging staff time cards. 

Simplify your process

How complex is your payroll process? Are you paying some employees monthly, others bi-weekly? Things like this can result in errors in the payroll system and may force you to spend long hours trying to see where things went wrong. 

The same goes for how many different softwares you’re using. Where possible, use software that can handle as many tasks as possible, or with which you can merge data. When you have different programs for accounting, payroll, processing hours, etc., you’re much more likely to lose track of things and cause trouble for yourself later on. 

Outsource if possible

As a small business owner, you may simply not have the time to learn and implement a new payroll system, or go through your old one making changes. Sometimes, even though it is costly, the best thing you can do is outsource the task to a professional. 

There are many professional payroll management services and more businesses are choosing to outsource the task. Find one that fits your budget and relieve yourself of the strenuous responsibility. 

Take loans where needed

You may balk at the idea of taking out a loan for your small business, especially if you’re still in the early stages of your venture. How can you know you’ll pay it back without knowing how successful your business is going to be? 

The good news is, there are ways to do it safely and responsibly, and still achieve your goals. 

First of all, figure out which kind of loan you need: 

  • SBA loan or traditional term loan: Small business government loans, this type of loan helps with startup costs and is generally favoured by business owners in the formation process. 
  • Business credit card and personal loans: More difficult to attain in the beginning stages, these loans require cash flow support for repayment. 
  • Business line of credit: These lines are ideal for managing day to day expenses. Flexible funding, they allow you to loan as needed, covering costs that crop up in your daily business activity. They work well as a safety net for unexpected costs.

Once you’ve determined the kind of loan you need, it’s up to you to assess your financial situation to the best of your ability at this point in your entrepreneurial career. Determine your credit score, earnings, length of time in business, and financial reputation, in order to best understand the kind of repayments you can afford.  

You’re looking for the right financing for your business? Penta offers flexible credit offers exactly for your needs.

Keep good business credit

Taking out loans and keeping good business credit are directly linked. Stronger business credit will qualify you for a broader variety of loans, each of which can help your business in specific ways, as mentioned above. 

But to attain this, you first have to manage your business credit. 

Business credit is also called ‘creditworthiness’, and in Germany is referred to as your SCHUFA. A higher business credit rating indicates a stronger financial standing and will make it easier to obtain loans with good repayment schemes. 

What is your current business credit score? 

The first step to maintaining good business credit is to first check your business credit rating. This will give you a clear picture of where you stand and what are some of the issues that need addressing. 

Are there any issues or errors in your past?

Your credit score may not be perfect. Comb through it for errors, outdated information, misreported or incorrect information or even instances of fraud. Some of these may take time to clean up but it’s worth it for the result of a clean, accurate credit score. 

Are your vendors reporting your payment history? 

Companies are not required to report trades to the authorities in charge of creditworthiness. If only a fraction of your vendors are reporting each payment, you may have a short credit history which will end up being harmful to your overall score. 

Have a good billing strategy

Do you find yourself regularly needing to chase customers for their payments? Are you still waiting on payments from jobs done months earlier? It may be time to take a look at your billing strategy. 

Automate your billing processes

First of all, like with your payroll process, automate your billing process. It may take some time to set up because you’ll have to determine the following things: 

  • Automated trigger for when jobs are completed and invoices sent to clients
  • Regular billing cycle (e.g. every 30 days)
  • Automated payment reminders sent to clients when bills are not paid

Communicate with customers

Communication is key with most things in life; this remains true of your billing strategy. Let all clients and customers know how you plan to manage your billing, with a friendly email or electronic handout. This will alert them to any reminders sent, when the bills will arrive, and when you expect it to be paid by. 

Keep track of your books

As a small business owner, try not to let your accounting become a low priority. With so much else to keep track of you might keep pushing back the task of reviewing your books and getting everything up to date. Doing this can cause serious problems in the future, however. 

Teach yourself the basics, download good accounting software (even if you have to pay for it), and make sure you keep your business and personal accounts separate. 

You need a business account that grows with you? Penta offers flexible account models and extensions.

Spread your tax payments

Small business owners inevitably pay more tax than employees and will often have large tax bills to pay when the time comes. This is especially true when you are a new business owner and haven’t worked out how you can best organise your self-employed tax return

Receiving your tax bill can be stressful if it’s larger than expected. When this happens, it’s a good idea to pay back your tax owed in instalments, rather than suffering financially by trying to pay it all at once. 

In addition, make sure you’re eligible to pay it in instalments. Consult your local tax office when you have received your bill and ask if a payment plan can be worked out. Some national laws restrict tax payers from spreading their tax bill due to prior unpaid taxes or excessive amounts of tax to pay back. For instance, in the UK the payment range for paying your tax back in instalments is between £32 and £30,000, if the taxpayer has no prior payments or debts. 

Plan ahead

When it comes to running your own business, planning is everything. Plan how you would like your business’s trajectory to look, plan the goals you want to achieve along the way, and plan how you plan to achieve those goals. Plan, plan, plan. 

But what is the best method for planning ahead? 

Planning is really another word for budgeting. You may think budgeting restricts the goals you want to achieve with your business, but really it’s a way of ensuring you’re more likely to achieve them. 

Budgeting will enable you to track the progress of achieving your goals. If you have a clear monthly budget for business-related activities, you can observe the increases or decreases in profits at the end of each month and adjust accordingly. Your understanding of your business will deepen and you will be able to forecast better for future goals. 

Make a cash flow statement and forecast

Your cash flow statement provides information on all cash related income through the following means: 

  • Operations
  • Investments
  • Financing

The resulting statement from calculating the cash accrued through all these means is your net cash flow. With this statement you can provide analysts and investors with a clear portrait of all the transactions going through your business. The cash flow statement is arguably the most intuitive financial statement you can make due to the totality of understanding it provides you with. 

Types of business finances

The two types of business financing are debt financing and equity financing. Most companies will use a combination of the two, but there are advantages to each which are worth exploring. 

Debt financing

The process of borrowing money and paying it back with interest, debt financing most commonly takes the form of a loan. Partaking in debt financing may place restrictions on your company, because creditors tend to look favourably on companies with a low debt financing to equity financing ratio. This is because a large amount of unpaid debt may make you appear liable as a company. It’s important to use debt financing sparingly.   

Its advantages, however, include: 

  • Once the debt to the lender is paid, the relationship ends, leaving you entirely in control of your business
  • The accrued interest is tax-deductible
  • Forecasting expenses is easy because your loan payments will not fluctuate

Equity financing

Under equity financing, you sell a portion of your company’s equity in return for capital. This gives an investor some control over your company, say 10% of shares if you wish to sell that much. They will have influence over the decisions you make in the future. This is where equity financing has its drawbacks, because having more members with influence over your company can complicate decisions and deter you from your original goals. 

The advantages of equity financing include: 

  • You have no obligation to repay the money acquired
  • There are no additional financial burdens
  • You will have more capital to invest in growing your company

Conclusion

A well-managed business is one which keeps track of its spendings and has a good grip on its finances. There are many ways to do this which can often seem overwhelming to try to handle all of them, but the more methods you implement as you discover how to manage business finances, the more likely you are to avoid becoming one of the 89%. 

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