Good small business financial management begins with a solid understanding of who will handle which responsibilities. Then companies need to develop budgets. To help ward off insolvency, individuals in charge of financial decisions need to develop an understanding of the difference between cash flow and profit. They also need to ensure that their companies maintain stores of emergency cash and that bills are paid on time.
One of the first steps in small business financial management is to determine how the task will be handled. A business owner may decide to assume full responsibility for all financial duties, she may share them with a business partner, or a professional may be hired for some or all of the duties. It is essential that everyone involved is clear on the role that they are expected to play. Everyone should also invest the needed time to learn about the documents, tools, and regulations that they will interact with in fulfilling their duties.
Another important step in small business financial management is implementing necessary structures to avoid an as-the-need-arises approach to spending, which can be detrimental. It is important to analyze expenses and to implement a budget. When it is expected that major capital expenditures will be required in the future, a plan should be developed for funding them. Also, business owners should avoid using company assets as a personal line of credit. As with other employees, it is best for owners to also be subject to structured compensation.
To help ward off insolvency, individuals with financial responsibilities need to understand that cash flow and profit are two very different things. Cash flow is a stream of funds that can flow in and out. Profit is the gain a business experiences after expenses are deducted. If a business sells an item or service, the sales price must not be confused with profit. In many cases, small businesses do not adequately figure in all expenses and some sales do not yield any profit. For this reason, ensuring the proper pricing of goods and services is an important part of small business financial management.
Small businesses need to keep an emergency store of cash. In personal finance, individuals are often encouraged to develop savings that are equal to several months worth of living expenses in case an unexpected event, such as job loss or long-term illness, occurs. While the reasons that a crisis may arise may be different, the underlying principle is the same with businesses. Small businesses need to have backup funds to pay for items such as inventory, payroll, and operating expenses in the event that they cannot perform financially as they normally would.
Paying bills on time is essential for small businesses. All necessary effort should be made to avoid paying interest on overdue balances because it amounts to money wasted. If credit, which is also subject to interest, is used to pay interest on delinquent bills, this form of irresponsible payment behavior becomes even more expensive. In addition to the costs of late payments is the damage that it can do credit ratings. Bad credit can present a small business with a wide range of problems, including the inability to borrow and thus to expand.