Seven Principles for Business Financial Management

financial management1 Seven Principles for Business Financial Management

If you’re new to running a business, or you’re looking into it as a way to make a stable future, you need to know how to manage your finances in a way that minimises potential risks. There’s more to it than coming up with a winning idea; you need to learn sound  financial management.

1. Think Real, not Ideal

When your business is in the early stages of planning and development, it’s easy to estimate your potential profits and expenses in an ideal world. These numbers can be useful for some calculations, but you will want to create more realistic — that is, lower — numbers for most of your estimates. Be conservative and leave in some extra wiggle room for the basic business catastrophe. You don’t want to be one of those businesses where a late shipment or minor defect leaves you deep in the red.

2. Find a Financial Planner

Unless you’re a financial planner yourself, chances are you can benefit from an expert opinion on financial management. Finding an amateur accountant friend to run your finances isn’t a great idea. A simple accounting mistake can have long-term consequences, particularly around tax time. Business tax code is labyrinthine, after all. The cost of a professional accountant may be high initially, but the savings come in tax deductions, lower risk and more solid financial stability.

3. Maintain Honesty

There comes a point in the life cycle of many businesses that you need to step beyond planning and into the world of investor communication. Hunting down a few investors to help fund your business will take a lot of the stress and guesswork out of your early years. You need to maintain honesty when you’re communicating with any potential investor. Hiding your finances or, worse, exaggerating them to make your company look better will just put you in deep water when the reckoning comes.

4. Don’t Forget the Value of Time

Using a business to come into financial independence is the primary goal for most business owners. All too often, however, we find ourselves in a position where our personal lives and our families suffer in favour of the business. It’s important to remember that the time you spend on your business has a value of its own. You might need to take the step of hiring someone to pick up some slack and give yourself the time to recharge. You might simply need to work in the budget for a luxury, whether it’s a new gadget, a trip abroad, or even world cup tickets for yourself and your family.

5. Pay Yourself, not For Yourself

This is an important step that too many business owners overlook early in their careers. Your business finances and your personal finances are separate. No exceptions. If your business fund is paying for your groceries, you’re doing something wrong. Pay yourself a salary as the CEO of your company. That doesn’t mean a huge salary, just as much as you need to survive and thrive — and more importantly, enough to leave business funds left over for reinvestment, paying further employees, creating a buffer and maintaining profits.

6. Track Everything

Every time you or an employee buys something for the business, record it and file the receipt. Every time you make a transaction that brings in a bit of profit, do the same. Keeping track of your finances is crucially important, particularly in the early years of running a small business. When it comes time to do your taxes — or, in the worst-case scenario, in the event of an audit — you’ll be able to pull out an Excel sheet with your detailed finances, correlated with a file of receipts.

7. Minimise Fixed Expenses

It sounds like basic advice, but keeping your expenses low while you’re starting a business gives you more leeway to maintain profitability in the early years. Renting a large space for a business office is probably not the right decision when you could rent a smaller space or convert part of your home into an office. Consider buying secondhand printers and other devices, rather than investing in brand new machines. Business discounts and bulk discounts through retailers will help, of course. You should also avoid signing on for long, expensive contracts, even if you’re sure you need what you’re buying. Two years down the road, a better deal may be available, but you’ll be locked into a contract.

Finally…

In the end, it all comes down to careful management, smart decisions and remembering that time is as important as money. Keeping that in mind will help with the necessary pains of starting a business.

photo credit: SalFalko via photopin cc

3 thoughts on “Seven Principles for Business Financial Management”

  1. What the accountant may cost compared to your time not spent looking for clients, and what it would save you in lowering your taxes is really worth it, unless you are an accountant yourself.

  2. Good list. Even though I’m a former financial advisor, I’d put finding one lower down the list. I was able to help people more when they had a great image of what they wanted to do and how they’d set up the business. If I was involved in the process too early, you’d end up paying for my time without as much result. We’d just brainstorm together…..

  3. I love the “pay yourself, not for yourself” Principle. Mixing business and personal finances can be messy and will make the business budget difficult to balance at the end of the fiscal year. With small businesses, it seems as if this happens too often.

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