Approximately 33.2 million small businesses call the United States home. They comprise 99.9% of all the nation’s firms. They also provide jobs to over 60 million Americans, nearly half the U.S. workforce.
As impressive as those figures are, many small businesses fail every month. For example, in 2021, the failure rate for firms in their first year was 20%, while it was 50% for those in their fifth year.
Money matters, in turn, were among the most common reasons for those failures.
To that end, we created this list of financial tips for running a business intelligently. So read on, as you can use what you learn here to raise your odds of building a successful company.
1. Create a Budget
Creating a budget allows you to track your business’s cash inflows and outflows.
Inflows refer to the money entering your business. Examples include sales, customer payments, and profits.
By contrast, outflows refer to the money that leaves your firm. Most are business expenses, but they can also be profit losses.
If you know how much money is coming and going, you can determine if you’re profiting or not. If it’s the former, then fantastic. If it’s the latter, you must review your expenses to determine which ones you can minimize.
Your business costs can either be variable or fixed. Variable expenses, like utility and service bills, fluctuate. Fixed expenditures don’t, such as your commercial property mortgage or rental payment.
There’s not much you can do to lower your mortgage or rent, but you can reduce many variable costs.
For example, you can cut energy costs at the office by turning off lights and devices that are not in use. You can also downgrade services like phone and internet to lower your bills.
2. Prioritize Necessary Business Expenses
While you should cut costs, don’t skimp on essentials like equipment maintenance. Otherwise, they can fail, halting your operations and causing productivity losses. For reference, equipment downtime costs the world’s top manufacturers nearly $1 trillion yearly.
Consider upgrading outdated technology, too, as it can be a safety and security risk. For example, if you’re using old computers, it might be best to recycle and replace them. One reason is that older computers are more susceptible to cybercrime and downtime.
3. Set Aside an Emergency Business Fund
Effective business management includes preparing for emergencies and disasters that can halt operations.
For example, suppose you have to close your office temporarily due to a flooding incident. Let’s also say the flood damaged some of your equipment, computers, and furniture. And even if it’s a temporary closure, you still need to pay your employees, mortgage or rent, and utilities.
Not having a business emergency fund may force you to tap the money you’ve saved for personal use. However, you can avoid that by setting aside an amount worth at least six months of business expenses.
4. Seek Professional Guidance for Business Finances
Running a business entails time-consuming but necessary bookkeeping, tax, and accounting tasks. Filing personal taxes alone can be confusing, but even more so if you add business taxes to the list.
Tackling finances by yourself can also make you miss opportunities for business growth. It’s also easy to make accounting mistakes that may lead to deficits and IRS penalties. Besides, crunching numbers on your own robs you of time you could otherwise spend on what you do best.
So, why not consider hiring a financial consultant or outsourcing an accountant? Of course, you’d have to pay them, but they can help you save and earn more in the long run. For instance, they can help ensure you comply with tax laws and that you don’t spend more than what you make.
5. Consider Seeking Financial Help
A business loan can give you the funds you need to grow your venture. For one, it provides extra capital you can use to purchase equipment and supplies. You can check out the guide linked here to learn more about these loans.
A business loan can also fund operational costs and, sometimes, your payroll. If you must expand your inventory, you can also use some of the loan funds for that.
Some business loans are specifically for financing equipment or property purchases. Aside from banks, you can get financing straight from equipment manufacturers.
Another financing program you can apply for is a business line of credit (LOC). It works like a credit card; you get a set credit limit you can borrow against to fund business costs. Then, once you’ve paid the credit you’ve used, you can “reuse” it when the need arises.
6. Never Go Without Business Insurance
According to the most recent federal data, 2.1 million nonfatal job injuries occurred in the U.S. in 2020.
If you don’t get worker’s compensation insurance for your employees, they might sue you. This coverage is mandatory in all states except Texas.
You’re also at risk of lawsuits due to defective products. Even if you weren’t aware of the defects, you might still be liable if they harmed someone. That can affect your business’s reputation and result in hefty legal fees.
Accidents on your business premises can also set you up for lawsuits. An example is if a client falls down your office stairs because it has defective rails. That person may sue you for not maintaining this part of your property.
Comprehensive business insurance can help protect you from the costs of those liabilities. If you go without it, you risk facing significant, even bankruptcy-causing expenses. So, ensure you have adequate worker’s comp and commercial liability coverage.
Another coverage you may need is commercial auto insurance. You may have to get this if you use a personal car to conduct business activities.
Be Business Savvy With These Financial Tips
Here’s one final fact you should know: over 22,000 U.S. businesses went bankrupt annually from 2016 to 2020. Many of these bankruptcies and closures resulted from a lack of financial planning.
You don’t want that to happen to your business, so consider following all our financial tips as early as now.
For more business and finance guides like this, check out our latest news and blog posts!