What Every Small Business Owner Needs to Know About Finances


As a small business owner, planning and understanding finances is usually a bit overwhelming if you don't come from an accounting background. While it is easy for salaried employees within established large businesses to have exact answers to questions like, ”How much is my monthly net income”, for small business owners the answer is usually “It depends!”. Here's what every small business owner needs to know about finances:

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There can be various factors as to why you don't know exactly what your income is going to be. Many businesses are seasonal, especially retailing. While they see a large proportion of their sales during the holiday shopping season, freelance professionals find the same period trying as their clients are on holiday with family, thus delaying giving out work. In such cases, it is better to think of your income annually instead of monthly. This evens out many factors.

Another aspect which can confuse small business owners is if they have several members of the family involved in the business. Then how do you know exactly how much you earn? Also if, along with the business, you have other revenue streams, this can also lead to doubts. The best way to handle this is to base your figures on a definitive regular revenue stream. And take it from there.

Small business owners also need to plan their finances. Below are some helpful pointers on how they can do that, so that random expenses like a health problem or an unexpected cost do not create a financial shock.

1. Create a Budget

You might have already created a household budget before you even decided to start your business. Business budgeting works the same way. Just as every person, every business needs to know about its income and expenses. First of all, this is to determine if your income in enough to cover your expenses. This keeps your business alive. After that, we need to know how much profit is being generated. All future growth will be determined by this figure.

Also when you create a budget, you get a reading on how much is being spent where. You can analyze this to make sure that the allocation of your budget is where you would like it to be. Each business has different needs and requirements. That is why it is so important for each business to prepare their own budget.

Recommended reading: 5 Top Tips for Managing Your Business Finances Better

2. Build a Reserve/Emergency Fund

Just as we a ‘Piggy Bank’ to save when we are children, a business needs a special financial cushion to meet sudden or unexpected expenses. The general norm is to build up a reserve of at least six months worth of expenses. There has been a modification to this with the advent of online businesses and startups.

When startups look for funding, they are usually looking for at the funds to cover a year of expenses. By that time, the necessary infrastructure that they need to build and scale their business would be in place, or at least in motion. Sometimes, they are able to raise enough funds to cover even two years of expenses.

3. Be Careful About Debt and Cash Flow

When a new business is started, the chances are you will take on debt to get it going. You are probably giving up a steady income to become an entrepreneur. If you do not budget properly you may end up in a debt trap, so be very careful about debt and personal guarantees.

And mind the cash flow in the business, cash is king!

4. Save for Your Golden Years

Most businesses are started by people with a passion for what they do. Mark Zuckerberg had a passion, saw an opening and is still working day and night to visualise and realise his dreams.

Still no matter how talented or hard-working we are, you can’t deny there would come a time, maybe way down the road, when you would want to sit back, relax and enjoy what you have created. So planning to save for that period is also a necessity. Even a little saved regularly adds up over time.

Take advice on funding your pension as well as your employees to make sure it's done in the most tax efficient way. 

5. Be Properly Insured

Small business owners are some of the greatest risk-takers in our economy. Each and every one of the largest companies today started out that way. When you are already taking on so much risk, it is smart to be adequately insured. You should try to de-risk as much of the business as you can.

After all there are only 24 hours in a day, and you should be spending as much time on the growth of your company as possible. So determine which are your prized assets and make sure that they are protected so that your business only has to worry about how to grow.

Recommended reading: 5 Simple Financial Tips for Startups and First-Time Entrepreneurs

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