Every major business in this world began as a small enterprise. Excellent examples include Amazon, Airbnb, Virgin Group, KFC, Starbucks, Subway, and Mattel, among others. Consistent quality of service and astute decisions taken by founders led to their grand success.
There are several elements that decide the success of a business. Prime among these is an ability to innovate, meeting customer needs and above all, excellent money handling skills.
The sole purpose of every business is to make money. Spending too little- or too much- can sound the death knell of a small business and land the owner in financial doldrums.
Here we look at seven excellent financial habits of small business owners.
Frequent Review of Business Financials
This is the secret of success for every small business. As owner or partner, you need to know how much money your business is generating and where it spends. Knowing sources of income for your business is vital. It helps you to focus on a specific market or increase effort in another, where the business needs some strengthening.
It also enables you to withdraw smoothly from markets that are non-productive, declining or incurring losses in terms of money, effort and time. Remember, time and effort also count as money since you pay for these resources.
Understandably, every business will have highs and lows due to spurt or ebb in demand due to various reasons. These can be due to seasonal demands, economic situations, climatic aberrations and several other factors. Knowing how your small business fared over the last 30 days helps analyze these fluctuations and readies you to meet future challenges.
Watch Your Payroll
Small businesses are often a disadvantage when it comes to payroll. Having too much staff means long payrolls and higher spending as wages. You can open a small business without having an employee. There are several small business ideas that dispense the need to have staff. Having too few employees means work overloads and overtime payments.
Working without employees can prove stressful and adversely impact your small business. Hence, you need to assess whether your employees are delivering what is expected. You can calculate this easily by weighing various parameters such as profits and productivity of each worker vis-à-vis the expense. Hiring fresher candidates for non-specialized jobs helps reduce payroll burden.
As a business owner, you also need to pay yourself a salary. Include yourself on the payroll. Decide how much money you will pay yourself. This can be done by finding out how much money would anyone with your qualifications, skills, and experience earn if they worked for another employer.
Add a couple of perks for yourself since you will need to maintain a particular lifestyle as a business owner. Never neglect to pay yourself. Use your salary just as you would while working for another employer. This prevents digging into the company kitty to meet routine and other expenses.
Make & Review Business Budget
Accurate budgeting is a must for the success of every small business. Ideally, you can draw this budget once every year through a lot of finance experts advise setting this for every six months. You can draw a budget based on the calendar year or financial year, for taxation and accounting purposes.
A budget for a small business should cover various heads such as the cost of premises, bills for electricity, telephone, Internet and other utilities, transportation, warehousing and logistics, payroll, expenses for sales, marketing, and promo activities, loyalty program and customer care, among other heads.
Include taxes and other levies that you will have to pay the government and other authorities to ensure the legitimacy of the business. Review the budget every month to know whether you are spending heavily on areas where there is lower or lesser return on investment, expenses on essentials and returns versus investments.
Frequent reviews help you to reallocate finances where they will fetch more return on investment. In fact, drawing a budget and reviewing it should be included as part of the overall review of the financial performance.
Create Hedge Fund
Most successful investors create a hedge fund for the business since inception. Such a hedge fund is created by keeping away some part of the monthly profit aside. The money is invested in one or more financial products that will fetch returns by way of interest or dividends.
However, you need to ensure that money allotted and invested for the hedge fund can be withdrawn whenever you need, without incurring losses such as bank penalties. Though this figure is highly debatable, it is estimated between 60 percent and 90 percent small businesses and startup ventures flounder and fail within the first five years of operations due to lack of finances.
Setting up a hedge fund protects your business from running out of cash in the first few years when profits may not be very significant. The money is also handy when expanding to newer markets, opening a new line or range of products and services or innovation of your brand offerings.
Reduce Liabilities & Debts
As a small business owner, focus on ways and means to lower and eliminate liabilities and debts. Often, small businesses begin with borrowing money from venture capitalists or banks and other lenders.
If you have availed external funding for the business, it is worth paying off creditors at the earliest to save money that would otherwise have gone towards interest. Repaying debts faster increases credit ratings of your business. This proves very useful if you need to avail a loan later for expansion of the business.
Also, it is worthwhile to clear every outstanding bill presented by a supplier at the earliest. You benefit by developing a healthy market reputation for the small business. Additionally, you no longer need to part with a portion of your profits after all debts and supplier bills are settled.
Proper Business Registration
Nowadays, you can register a small business in many ways such as sole proprietor, partnership, Limited Liability Partnership and many more. Based on your business model, choose the right type of business registration or incorporation, as it is known.
Before incorporating your small business, it is advisable to study benefits available to different types of registrations. Some may offer tax benefits while others can limit your liabilities, should the need arise.
Opting for a proper business registration helps save enough money. Firstly, it helps you dispense with the need to get multiple permits for a single business. Secondly, you can avail specific tax benefits of profit sharing and finally, it helps prevent lawsuits that may arise due to the wrong incorporation.
Use Free Marketing Resources
Another excellent financial habit for small business owners is to utilize free marketing and promotional resources available on the Internet/ Instead of spending heavily on advertising your business, use free marketing resources available online.
The Internet offers several free marketing resources. They enable you to advertise and promote your small business to a broader audience. Additionally, you can also sell products or services online by using these resources.
However, to effectively use these free marketing resources, you will have to incur a little expense. Allot a small amount of money for creating content that can help create awareness of your small business and fetch more customers.
Free marketing resources include Facebook Business, Facebook Marketplace, Shopify, affiliate marketing and seller programs on major online stores such as Amazon and eBay and many more. Create a PayPal account wallet linked to the bank account of your business to monetize online orders.
Finances play the single most important role in any business. How you handle finances as small business owner decides its success and future course. Generally, most small business owners have excellent financial habits at launch.
However, in following months and years, business owners tend to focus more on development and expansion of existing and newer markets, throwing financial habits and caution to the winds. Invariably, lack of financial planning and reviews has disastrous consequences.
Accurate financial planning and reviews help to stem the flow of cash from your profits. Good financial habits ensure your small business flourishes and is successful.