When you are your own boss, you're everything: sales, HR, IT, marketing, payroll and everything in between. With everything on your plate, it can seem daunting when someone tells you that you should be on top of your business' financial health. Ain't nobody got time for that!
Actually, you do. And you should. Here are a few ways you can improve your small business financial health.
Eric Reis coined the term with his book The Lean Startup in 2011 and the philosophy applies to all kinds of businesses—even Kashoo! Think before you sign the lease on that hip new office space, buy that 3D printer, upgrade your computers, or purchase too much inventory. Can you keep your business running successfully without those things? If the answer is yes, then hold off and concentrate instead on increasing your cash flow so those investments make more sense. Roll items you want to upgrade into the budget for next year instead of rushing to get them now.
Keep Great Records
You need three things at a minimum to track your business finances: a profit and loss statement, a balance sheet, and a cash flow statement. A profit and loss statement tracks how much you’re spending compared to how much you’re earning, and provides the perfect snapshot for where you stand financially. Your balance sheet monitors your assets, liabilities, and net value. Educate yourself about what each of those things are, and visit them monthly. Your cash flow statement shows you how and when money comes in and goes out and pairs nicely with your profit and loss reports to tell you if you’re really making a profit. Take the time to educate yourself about these three tracking tools and you’ll be ahead of the game.
Luckily, there's some simple cloud accounting software out there that helps make keeping great records a snap!
Set Goals and Measure Performance
Setting goals might not seem like it has a direct impact on financial health, but it’s an absolutely critical element of success. A smart business has a one-year plan, a five-year plan, and even a ten-year plan. Sit down and give yourself a series of specific goals, such as new clients acquired, revenue targets or units sold and then track how well you’re meeting those goals. You can even set distant future calendar reminders! You will be able to spot trouble coming this way as well as get a sense of what’s worked and what hasn’t. You’ll gain valuable information that might encourage you to pivot and refocus your business for maximum profit.
Have Cash Reserves
Being an entrepreneur is a bit like taking a leap and hoping a net will appear, but having cash reserves is the way to have that net before you leap. Take a good long look at your personal budget and determine what your monthly expenses are. Try to have a reserve of cash that will cover those expenses during slow period. The rule of thumb is that if you're starting a business on your own, you should buffer at least six months of reserves. This sort of planning seems conservative, but there's zero reason not to do it. Plus it can only improve your small business financial health in the future.
Separate Business and Personal Finance
This can be tricky, particularly for freelancers. When an invoice is paid, you deposit it to your personal checking account and start paying bills. But doing it this way will make it challenging to get a business credit card or a business loan should you decide to do so. Start a business checking account, organize your business in the eyes of your tax overlords (IRS, CRA, state/province) and pay yourself a salary instead. This will make your life much easier at tax time, too. It seems like extra steps, but keeping business and personal separate is the way to go.
While there is no magic bullet to small business financial health, there are things you can do. Start with these and don't forget—good accounting and bookkeeping habits are the foundation for small business financial health!
As always, nothing in this article should be construed as legal or financial advice. Always talk to an expert!