As an aspiring small business owner, you’ve been self-funding your vision. You also know that, at some point, you will need to find the right funding to take you to the next level. It is important to start managing your business finances for growth from the beginning. Building your vision includes building a strong financial foundation. You have to position your business to secure funding, and sound financial records are a part of that positioning. In this blog, I’ll show you how to start managing your business finances and provide actionable tips to help you position your business for funding and long-term success.
Understanding Your Finances
Let’s start by reviewing the basics. Before you can effectively manage your finances, it is essential to understand your business’s financial status. This includes your revenues, expenses, profits, and cash flow. You can create a simple spreadsheet to start tracking these expenses. I know a few of you will tell me that you prefer paper and pencil or you have a notebook, however, try and trust me on this – you need a spreadsheet, or at the very least some type of financial tracking system that will compensate for human error. You can try a spreadsheet, like this one. You will need to make a copy to use it. If you are ready to take the plunge with an online system, here is the one I used to get started. It’s free and pretty user-friendly (I’m not affiliated).
If you haven’t opened a business banking account, do that today. It is a mistake to put this off until you have “significant funds or sales”. Start practicing this muscle early and often. Separate and manage your business finances in a separate account. There are plenty of banks that have low opening deposit requirements.
Managing Your Finances
The next step to managing your business finances is to create a budget using the spreadsheet you created in step one. The budget is a financial plan that outlines your expected revenue and expenses over a specific period. It is important to note that the budget I’m referring to here is your working budget, not the budget you created for your business plan. This is where you are going to record what you spend on your business and the amount of money you have invested in your business to cover those expenses.
If you are self-funding your business (and if you are a forced entrepreneur you most certainly are) use this process to manage the integration of your personal life with your business life. Starting a business is a stressful journey and finances will play a large part in that stress. Create a process that helps you manage early financial concerns by determining how much of your personal finances you can comfortably contribute to your growing business. In the beginning, you will want to do this by month to account for unknown changes in your environment. Life is complex and by accounting for these complexities in your budget, you can still grow your business without worrying that you are taking something away from your personal life.
Use the sample budget I linked earlier and put the amount you’ve determined in the first line of the Income section titled “Personal Investment”. Complete the rest of the budget by replacing the sample numbers with your actual numbers.
Positioning your Small Business for Funding
Business funding refers to the financial capital that businesses use to start up, expand, or operate their businesses. There are many different types of business funding, including loans, grants, and investments. Each type of funding has its own set of qualifications and criteria, however, the most important step is making sure your business has sound financial practices.
Why Good Financial Management Practices Matter for Small Businesses
Good financial management practices are critical for any business, regardless of its size. They help you make informed business decisions and ensure that your business remains financially healthy.
But for small businesses, good financial management practices are especially important. This is because small businesses often operate on tight budgets and have limited resources. Without good financial management practices, small businesses are more likely to run into financial problems, which can lead to missed opportunities for growth and even business failure. In addition to creating a budget, here are some other tips to help you position your business for success.
Create a Financial Plan
One of the first steps in good financial management is to create a financial plan. A financial plan outlines your business’s financial goals, strategies for achieving those goals, and the resources required to implement those strategies.
The financial plan is more than a budget. It can help you identify potential funding sources and determine how much funding you need to achieve your goals. It can also help you determine the most effective use of funding and ensure that you have the resources to repay any loans or investments.
Monitor Cash Flow
Cash flow is the lifeblood of any business. Without sufficient cash flow, businesses can’t pay bills, purchase inventory, or invest in growth opportunities.
Small business owners should closely monitor their cash flow to ensure that they have sufficient cash on hand to meet their business’s needs. This means tracking inflows and outflows of cash, predicting future cash needs, and having a plan in place to manage any cash shortfalls.
Small business owners often find themselves bailing out their businesses by covering expenses as they come up. Determining the amount of your personal investment and sticking to that number is an example of monitoring cash flow. The financial plan then helps you identify potential cash flow problems before they become critical and take steps to address them.
Maintain Accurate Financial Records
Accurate financial records are essential for good financial management. Small business owners should keep track of all financial transactions, including sales, expenses, and investments. Simply put, keep track of everything you spend or receive as it relates to your business.
When you have a clear understanding of what’s going in and what’s going out, you can better understand your business’s financial health, identify areas for improvement, and make informed business decisions.
Accurate financial records are also important when seeking funding. Investors and lenders will want to review a business’s financial records to determine its financial health and potential for growth.
Seek Professional Help
You don’t have to go it alone when it comes to financial management. Seeking professional help from an accountant or financial advisor can provide valuable insights into a business’s financial health and strategies for improving it. Learn early that you don’t have to know it all, however, you do need to know how to get the help you need.
Professional help can also be valuable when seeking funding. Accountants and financial advisors can help small business owners prepare financial statements and projections that demonstrate their business’s potential for growth and profitability.
Build a Strong Credit History
A strong credit history is essential for small businesses seeking funding. Lenders and investors will review a business’s credit history to determine its creditworthiness and potential for repayment.
Small business owners can build a strong credit history by paying bills on time, maintaining low credit card balances, and avoiding opening too many new credit accounts at once. They can also establish relationships with banks and lenders to demonstrate their creditworthiness and increase their chances of securing funding.
Diversify Your Funding Sources
Small business owners should not rely on a single source of funding. Instead, they should diversify their funding sources to reduce their risk and increase their chances of securing funding.
Diversifying funding sources can include seeking loans from multiple lenders, seeking investments from multiple investors, and exploring alternative funding sources such as crowdfunding or grants.
By diversifying funding sources, small business owners can improve their financial stability and position themselves for future growth opportunities.
Conclusion
Good financial management practices are critical for small business owners seeking funding. By creating a financial plan, monitoring cash flow, maintaining accurate financial records, developing a budget, seeking professional help, building a strong credit history, and diversifying funding sources, small business owners can position themselves for funding opportunities and take their businesses to the next level.
While implementing these practices may require some effort and investment, the benefits are well worth it. Good financial management practices can improve a business’s financial health, increase its chances of securing funding, and ultimately lead to long-term success.
So if you’re a small business owner looking to position your business for funding, start implementing these financial management practices today. With the right strategies in place, you can achieve your business goals and take your business to the next level.