Are you a striving entrepreneur trying to succeed in the business world? As exciting as it is to run your company single-handedly, managing finances is a challenging aspect. Some business owners struggle to scale down costs, whereas others keep accumulating debt by taking new loans. After all, handling money-related matters is not everyone’s forte.
Remember, you cannot keep your business afloat for long without effective financial management. Managing business finances is all about establishing healthy financial habits. It involves checking credit balances, fulfilling tax obligations, and keeping track of business costs. Likewise, a massive part of financial management includes improving credit history and managing debt. These processes help reduce expenditure and increase profitability.
Let us show you the ropes if you have little experience handling finances. Here, we have highlighted six ways to improve business financial management.
1. Stay on Top of Invoices
Today, managing invoices has become a challenge for business owners, especially for those relying on credit sales. Most clients keep delaying payments, whereas others start to default, leading to no payments at all. These bad debts drain financial resources and increase business expenses, leading to low profitability. Hence, keeping track of your invoices is crucial.
Before you bring a client on board, conduct extensive due diligence to understand their financial standing. You can also integrate a cloud-based accounting system to track customers and their invoices. Besides this, you can hire a transaction monitoring analyst to monitor transaction activity and assess any potential risks associated with your client’s payment behavior. These analysts can provide insights into transaction trends and help reduce the likelihood of defaults and non-payments.
2. Improve Business Credit
As your business expands, you will find yourself applying for additional insurance policies and finances. All lenders evaluate your score and credit history before approving loans and transactions. Therefore, every entrepreneur should focus on building a good credit score. Here are a few tips.
- Request vendors for terms on your monthly payments to build a reputable credit history.
- Keep your credit utilization rate below 30% and pay the entire balance by the end of every month to avoid interest charges.
- Apply for net terms with vendors and suppliers that report to a credit agency.
- Avoid delaying utility bill payments since they also affect your credit score.
3. Create a Debt Management Strategy
Have you taken multiple loans? Business owners often acquire different loans to inject cash into the business. Some acquire working capital finance to maintain cash flows, whereas others opt for equipment financing to purchase fixed assets. These loans can be fruitful in keeping the business afloat, but have you considered the interest payments? Believe it or not, interest can massively drain your business profits. Therefore, create a debt management strategy to save up and repay debts.
You can begin by making early payments to settle your outstanding loans. That way, you won’t have to put money aside for repayments in the long run. Besides this, you can consolidate your debts and repay them altogether. Instead of making multiple repayments, you can make a single payment for your debt every month with a lower interest rate.
4. Develop a Billing Strategy
Another part of improving finances is adequate cash flow management. It ensures your business has sufficient cash to incur routine expenses and run operations. But if you struggle with cash flow management or your outflows exceed inflows, get creative with your billing strategy. After all, the root cause of cash flow problems is the customers who are consistently late on their payments.
Firstly, mention the payment terms and conditions on the invoice or contract being signed with the customer. Secondly, change the payment terms to 3/10 net 30. That means a customer will be eligible to receive a discount of 3% if they clear payments within ten days. If not, the full amount will be due in the next 30 days. These cash discounts encourage clients to clear their dues timely, improving cash circulation in your company.
5. Use Automation Tools
Today, business finances go beyond revenue and profits. Entrepreneurs have to manage cash flows, monitor invoices, scale down costs, file taxes, and pay suppliers. Sounds challenging, doesn’t it? Luckily, automation tools can be useful in improving financial management. It can help automate tasks, reducing workload from your end. Here is a list of automation tools you can consider:
- Bill Management Software: Recurring bills often lead to late fees and penalties, adding to a tremendous amount of expenses. These negatively affect cash flow and also exhaust finances. A bill management tool can help automate payments, saving you from additional costs.
- Inventory Management Software: Most companies find it difficult to manage stock levels, leading to shortages and surpluses. An inventory management software can help keep track of your stock. It tracks products in stock and ensures you don’t have cash tied up in inventory.
- Payroll Management: Payroll software can help businesses disburse salaries automatically. It can calculate hours, adjust for overtime, and create payroll reports, ensuring accuracy.
6. Adopt Healthy Financial Habits
Do you have internal financial protocols? A few rules and practices laid out internally can massively improve your business’s financial standing. It could be something as straightforward as reviewing financial information at month-end. It involves assessing expenses, profitability, and revenue and measuring overall progress. Likewise, monitor all business expenditures to determine how much money goes out of the business every month.
Furthermore, you can calculate ratios to measure year-on-year growth in terms of revenue, cost, operating profit, etc. It will help determine where your business stands financially and which areas need improvement. Most importantly, maintain a separate business account to ensure you don’t mix personal finances. It will also help reconcile bank statements and tax filing, enabling you to file returns on time.
Undeniably, handling business finances can be complex and tricky, but proactivity is the key. It is all about examining money-related matters and making informed decisions. You must keep track of invoices, create effective billing strategies, and increase cash flows. Likewise, entrepreneurs must manage debt wisely and work on building their credit score. Your financial habits can be a game changer for your company, setting up your business for success.