If you have started a small business, you understand the mixed emotions that come with this accomplishment. You have felt the excitement of working toward and accomplishing a goal and the fear and anxiety about making sure everything goes as planned. You may feel as if your time is best spent developing your service or product, gaining customers and hiring great staff, but your company’s financial health must take precedence. Therefore, these are a few tips to help you.
As you begin your small business financial planning, your first task is to separate your personal from your business finances. Start separate bank accounts, have different credit cards and separate your goals. You should never use business money to fund personal goals. This eliminates your personal liability protection and can jeopardize your company’s future by reducing its cash flow.
Focus on Cash Flow
Your available cash flow determines whether you can meet your short-term obligations, including salaries and raw materials purchasing. Your cash flow can also be used to build a fund for emergencies and investments. When you begin gathering assets, such as buildings or inventory, your cash flow is depleted.
Therefore, you need to know how much money is going in and out of your company. Consistent analysis will protect you from default on any of your bills, but it will also give you a consistent view of where your money goes and how you can stem the flow of your cash flow suffers. This is especially important during lean months or in seasonal companies.
Make Cash Your Metric
Liquidity is vital to your company’s financial plan because your lenders need to know how quickly your assets can be converted into cash before they give you additional loans. Yes, your balance sheet should have more assets than liabilities, but a significant portion of these assets should be liquid. When you can easily convert what you have into cash, you can cover lean months or unexpected expenses much easier. Therefore, watch your cash conversion cycle, days payable outstanding, days inventory outstanding and days sales outstanding. Closely monitor your daily metrics.
As you build your financial plan, you will define actionable steps you can take to strategically improve your cash flow and financial standing.