Five Small Business Finance Tips

Owning a small business involves much more than coming up with and implementing a business idea. Small business owners quickly learn that a huge part of their role as the owner of a business means learning how to take care of the financials. Here are several tips for small business owners who want to learn the best practices for managing their business’ finances:

1) Bookkeeping

To the dismay of many business owners, the ancient art of bookkeeping isn’t going anywhere. Fortunately, bookkeeping has become much easier. Bookkeeping programs can make the process much easier, but there are still certain fundamental rules that business owners must take into account. Firstly, business owners must always keep a record of all of the invoices processed by their business as well as the expenses they have incurred, such as raw materials, salaries, and operating expenses. While there is no solid rule for how to keep track of earnings and expenses, what matters most is that you keep track of your finances in a consistent fashion and that everything is written down. This is arguably the most important part of owning a small business.

2) Don’t Over-Exaggerate Your Earnings

When working with investors, banks, or other financial lenders, one of the biggest mistakes you can make is to exaggerate your business’ earnings. These lenders need to know how likely you are to repay the money they have lent you when making their decision about whether or not to lend it in the first place. Lying or exaggerating about your earnings will only harm you and the lender in the long run.

3) Make Sure All Of Your Funding is Backed by a Legal Contract

Regardless of where you are going to receive funding, you need to ensure that the terms of your financial agreements are written down on a contract. Unfortunately, things can become troublesome during the repayment process and it is therefore urgent that you and your lender lay out terms in the beginning that you must adhere to later on. This keeps both sides accountable and also ensures that both sides know exactly what they are getting into before the money starts circulating.

4) Cash Flow

A successful small business always maintains a sufficient amount of cash on hand to take care of daily operations and unexpected expenses. However, many businesses that have been successful in receiving funding find that the money they are lent covers already-existing expenses but doesn’t quite leave enough cash left over to keep on hand. This is why small business owners are familiar with the feeling of being stuck somewhere between outstanding invoices and bills that are past-due. One option for small business owners is to use a merchant cash advance. These types of business cash advances can provide small businesses with additional cash flow to meet these expenses or to grow their business, and they are repaid through future credit card receivables. This is an important option to consider for many small business owners who have been denied other forms of funding.

5) When to Process Credit Cards

The short answer: Now! Being cash-only is extremely inconvenient for most customers. While setting up a credit card processing system can be costly, your customers may find it more convenient to go to your competitor’s business once they learn that your business doesn’t process credit cards. Furthermore, using credit cards at your business functions as an instant line of credit and means less hassle and paperwork for your business. This can cut down on lengthy credit approval processes. Also, there are additional types of funding available for businesses who process credit card transactions as opposed to those who don’t.

Managing Your Small Business Finances

Only 40 percent of smaller independently owned and operated businesses survive for five years or more, according to the U.S. Small Business Association. The Federation of Independent Business (NFIB) reports that only 39 percent of these independent businesses are profitable.

If you want your business to succeed, you’ll have to learn how to manage your business finances.

Poor business financial management is one of the top reasons businesses fail. Managing your personal finances can be challenging, and managing your business finances is even more challenging. But if you can’t collect, track and save your money appropriately, you’ll be risking your profitability and success.

Improve Your Business Financial Management

Be proactive. Applying sound business principles to all of your decisions will help ensure your company’s success and longevity. Don’t rely solely on your accountant, bookkeeper, financial planner or banker. Keep all your records up-to-date, learn the basic principles of small business finance, and apply them on a daily basis.

Collections: The First Step to Good Business Finances

  • Credits and Collections: Determine if you should accept credit cards, and other forms of payments, and learn the best methods for quickly and efficiently collecting debts. Find out how alternative payments, such as trading products and services, or factoring, can positively or negatively affect your business.

Tracking: The Second Step to Good Business Finances

  • Basic Bookkeeping: Learn how to record your daily transactions, generate financial statements, and work with your accountant on a regular basis – or do it yourself with any one of the many financial management tools that are available today.
  • Cash Flow Management: Learn to manage your cash and liquid assets by assessing and projecting your needs. Always look for ways to increase your income and reduce your expenses.
  • Trend Forecasting: Identify positive and negatives factors that can help you manage your business finances more efficiently over time. Write these down and make sure you check them periodically.

Other Important Areas for Good Business Financial Management

  • Banking: Learn which type of savings and checking accounts are best suited to your needs.
  • Investing: Learn how to maximize the return on your surplus cash by choosing the best investments.
  • Evaluating: Evaluate expensive potential capital investments, like equipment, facilities and more.

Small Business Financing – Case Study

Generally, borrowing funds from alternative debt financing sources is more expensive than taking out a traditional bank loan. However, many times companies either do not qualify for a traditional bank loan or credit line or must pay very high interest rates, include a co-signer/co-borrower, and/or attach communal assets. In that case, these alternative sources are excellent financing sources. Remember, banks determine the interest rate charged based on risk. The highest credit grade corporate customers are charged prime. All other businesses are charged prime + a risk factor. If a bank will not provide financing, the perceived associated risk is higher. These alternative funding sources mitigate their risks by specializing in a particular industry or asset class and compensate for this risk by charging higher fees and/or interest rates.

Example- SBA loan.

A data housing firm, Acme Technologies, made the decision to spin off its data management operations in preparation for its strategic acquisition by a larger corporation. The data management division had largely gone unnoticed despite its successful management by the division’s management. Needing to recoup some value from the division, which Acme’s CFO suspected might be terminated by Acme’s acquirer, Acme’s CFO made the offer to sell the business to the division’s management.

Although the division’s management team was skilled in a number of functional areas including sales, operations, and cash management, they had no experience handling complex financial transactions. They needed guidance so they used their network to find an advisor. They approached a U.S. Department of Commerce-sponsored Minority Business Enterprise Center (MBEC) located at a renowned university for assistance. The MBEC assigned a business advisor to help them.

The business advisor advised the management team to create a company to buy the assets of their employer. She then found a lawyer that completed their incorporation documents and successfully registered the company within three business days. Next, she spent hours requesting and compiling documentation to create an Executive Summary, pro-forma financials, and management team resumes to present to banks and direct lenders. Finally, she used her relationships with financial institutions to locate three entities that financed acquisitions and worked rapidly.

The CFO initially gave management six weeks from the time the offer was made to complete the transaction. The business advisor pushed back in conversations with the CFO and wrangled an extension. Several issues arose which the business advisor worked through quickly with the management team.

Two institutions, one direct lender and one community bank, emerged as the front runners. Both were highly responsive and flexible and recommended the use of an SBA loan. The community bank met face-to-face with the management team and championed the other banking functions it could provide, along with the long-term benefits of working with them. Subsequently, the management team opted to obtain financing from the bank.

Five weeks after meeting with the business advisor, the community bank provided a Letter of Commitment (LOC) to finance the acquisition. Three weeks after obtaining the LOC, the management team closed on the financing and the purchase of the division and began operating under the new company name, Acton Technologies.