Small businesses face quite a few challenges and difficulties: they are more affected than large businesses by economic and security changes, and any change in the state of the business directly affects the economic situation of the household behind it. Many people spend a lot of time working without direction; which is why studying business can be particularly helpful. To choose a course that is right for you, it is important to consider business administration vs business management to know how they differ. In the meantime, however, we have collected some tips for sound financial management of a small business, in order to pave the way for growth.
1. Separate the accounts of the business from the household
When the business and the household are run in the same bank account, this may impair the economic conduct of both the business and the home. Therefore, it is important to separate the accounts, and decide each month which salary to draw and how much it is worth leaving in the business in favor of a growth investment.
2. Understand what stage the business is at
Economic decisions must be made depending on the stage of the business: whether it is a start-up business that requires large initial investments, or an existing business that is in a growth stage (a situation that includes challenges such as marketing, credit, recruitment), a stability stage, or a slowdown process. You have to map the state of the business and understand where it is now in relation to the market, the industry and the competitors and where you want to go in a year, two years or five.
Set goals and objectives with control mechanisms
The goals and objectives of the business should be logical, measurable, time-bound and with control mechanisms. The test mechanisms should be translated into daily, weekly, monthly or quarterly targets, and at any point in time check the rate of arrival at the target. It is important to set goals that the business can measure in practice and accurately.
4. Build a business budget
At the budget building stage, a conservative approach should be adopted: record the expected revenue and the expected expenditure. The difference between the two items is actually the budget framework with which the business can work. Make sure the business stands in the frame without breaking it.
5. Manage cash flow wisely
Goals, objectives and budget are theory. Cash flow is the actual situation, which reflects the liquidity of the business. If revenues are lower than expected and expenses are higher than expected – the business may find itself in a negative cash flow. Businesses rise and fall on cash flow. The company can be profitable, but its cash flow gap (the difference between the date of payment to the supplier and the receipt of income from the customer) does not allow it to continue its current operations. You should consult with a banker, examine the current short-term and long-term credit needs, understand what the cash flow gap the business produces and define how the business finances the gap.