Many small businesses owners typically go into business seeking more flexibility and control over their future, a better lifestyle and better earning potential. However, whilst you may have great skills in your area of expertise financial acumen may not be one of them. Here are some smart financial strategies to implement this year:
1. Have a budget
Few small businesses have a working budget and a cash flow forecast that they regularly review. As a result, they make decisions based on guesswork. If they are challenging for you, create something simple and work on improving it over time.
2. Put aside adequate funds for tax and GST
You must always put aside a percentage of every dollar received into an account for your tax and GST and forget that the account exists until its tax time. Your accountant should be able to tell you what percentage to use. If you don’t do this you could find yourself short of funds to pay your tax which is common for many small business owners.
3. Understand the difference between profit and cash flow
Many businesses fail when they are actually profitable due to cash flow issues. At the end of the year your business might be profitable but if your income and expenditure don’t matchup for a few months throughout the year you will have a cashflow shortage. This is common in many businesses because of seasonality and just fluctuations in revenue. December, January is often a very quiet time for some businesses in terms of revenue but most of your expenses could still be the same. From your cashflow forecast you should be able to get an indication of when you will be short of cashflow so you can put some funds aside in your more profitable months.
4. Improve profitability
When considering how to improve profitability there are too options. Reduce costs which there are only so many. Or find opportunities to grow revenue which is not limited. Understand the key drivers of your revenue which are mostly; the number of customers you have, how many times they buy from you and the average sale and work out how to improve each.
5. Separate business and personal expenditure
Always keep your personal and business expenditure separate. Ideally you want to pay yourself a wage or salary that is regular and paid into your personal account. It is extremely difficult to manage your money if you merge the two. How much you pay yourself should be worked out in your annual cashflow forecast.
6. Use technology to help you understand your numbers
There are so many great accounting software options today that read information from your bank statements. Once set up it’s very easy to get up to date accurate financial information so you can make good decisions. Your accountant can help you set this up. Just keep things as simple as possible so it’s easy for you to understand the information it provides to enable you to make smart decisions.