Entrepreneurs juggle multiple responsibilities, including sales, marketing, market research, product development, and customer service. Amidst these tasks, managing small business finances becomes the most critical yet daunting task, especially for those without a background in accounting or finance. However, by leveraging various tools and strategies, entrepreneurs can effectively manage their finances and reduce feelings of overwhelm. Here’s how to do it.
The Financial Overwhelm in Small Business Owners
Karen McCall, founder of MoneyGrit, explains, “Small business owners often become overwhelmed by finances due to several factors, including a resistance to facing the numbers and a lack of financial knowledge. Fear and uncertainty, along with self-sabotage and perfectionism, contribute to this overwhelm.”
Without a clear understanding of their financial standing, business owners can feel lost in a "money fog." This feeling is common, especially since most small businesses in the U.S. do not have a chief financial officer (CFO) and rely on the owner's financial acumen, possibly with the help of an accounting professional. The onus is on the business owner to utilize available resources to navigate their finances effectively.
Building Good Financial Habits
Establishing good financial habits leads to better decision-making in business. With a clear financial plan and regular tracking, entrepreneurs can make smarter choices.
“To combat financial overwhelm, business owners must build good financial habits,” says McCall. “Creating monthly spending and earning plans helps set clear goals and align financial activities. Tracking income and expenses against these plans provides a tangible way to evaluate progress and make necessary adjustments.”
Good financial systems facilitate better decision-making and problem-solving. Discovering issues like overspending or under-investing early allows for timely interventions.
Choosing a Financial Management System
Creating new habits, such as a fitness routine or financial tracking, requires effort but can be rewarding both financially and personally. Entrepreneurs should choose an accounting system they understand, whether it’s Freshbooks, Quickbooks, Xero, or another option. An effective system helps track income and expenses, produce essential financial statements, and monitor the business's financial health.
However, McCall warns, “Most entrepreneurs use bookkeeping systems with rear-view mirror accounting. You need to plan your monthly spending and earnings, then track them against your plan throughout the month.”
Using a Dedicated Business Checking Account
A dedicated business bank account serves as the financial command center. Mixing business and personal funds complicates understanding financial flows. Business revenue should go into the business account, and expenses should come out of it. Personal expenses should be paid with personal funds, separate from business finances.
Creating a Savings Buffer
Unexpected challenges are inevitable in business. Having a financial cushion helps manage these uncertainties. A savings account acts as a safety net during downturns or unexpected expenses. The amount saved depends on factors like business profit, industry volatility, and capital needs. Pairing a savings account with a line of credit provides additional flexibility.
Utilizing Business Charge or Credit Cards
Switching from personal to business credit cards separates business and personal finances, aiding in tax deductions and financial clarity. Business credit cards offer rewards but often have high-interest rates, so avoiding a balance is advisable. For short-term financing, consider a business credit card with a 0% intro APR or a business debit card for tracking expenses.
Investing in Financial Education
Financial literacy is crucial for small business success. Investing in financial education helps entrepreneurs navigate the complexities of business finances, making them better equipped to face challenges and make informed decisions.
Automating Financial Processes
Automation simplifies repetitive tasks, freeing up time for business growth activities. Tools like payroll software, accounting software, merchant services, business checking with cash flow tools, invoicing systems, and business credit cards streamline financial management. However, regular review of business finances is essential to stay informed and make necessary improvements.
By implementing these strategies, entrepreneurs can gain control over their finances, reduce overwhelm, and set their businesses on the path to success.
Commenti