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Tips on managing finances with a small business
Managing the finances of your small business can be one of the most dreaded pieces of owning a small business, but is one of the most crucial aspects to your company's success. Here are some tips that may help you manage your finances:
The first thing you need to do is to create / design / set up your accounting system. How?Start by selecting which type of accounting method you plan to choose.
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- The Cash Method: this means that you count income when you actually receive it (either as cash, credit card charges or check) and your expenses are counted when you actually pay them. This is the most common method for small businesses, especially those that take immediate payment for a product or service (credit card, check, cash, etc.)
- The Accrual Method: this means that you count income when a sale is made (regardless if you actually receive the money for it) and expenses are counted when you actually receive the good or service (instead of paying for it immediately). This method is common for larger businesses or small businesses that utilize "invoicing" and frequently deliver a product or service before being paid for it.
Next you'll need to set up your chart of accounts. This is a listing of all the various types of accounts you have. These can include income accounts, expense accounts, asset accounts, etc. Having an accountant can be of great help to you during this entire process and can help to insure that everything is set up properly so you don't have to worry about mistakes needing to be corrected later on down the line.
Finally you need to learn and maintain your system. This means you have to actually use the system you put in place. This means entering every transaction, bill, etc. It makes no sense and causes problems and mistakes if you set the system up and only use it occasionally. You should also maintain your system by reconciling your accounts with your bank statements regularly. Compare all of the transactions. This forces you to properly account for all of the company's money.
Below are a few more tips to help you manage the finances of your business:
- Clearly identify the resources you need.If you have a list of all the start up costs and equipment you are less likely to run into "surprises" later.
- Use your own resources, without sacrificing personal or family budgets. The more of your own money you can use, the less you have to borrow and the less you have to pay back in interest. You also avoid having to give up any equity to third party entities.
- Consider loans and investments from family and friends. This is a personal decision. Be realistic about how involved you want these individuals to be in your business. This can be helpful in providing you flexibility and cash resources that otherwise might not be possible with a start up company.
- Compare costs of different sources of financing. There are multiple ways of getting your hands on cash for your business. Carefully weigh the costs and benefits of each of the various methods. This requires a little shopping first.
- Consider venture capital or angel investors. These investors are interested in an equity exchange. This means they provide cash for a piece of the businesses earnings. These can provide great advisory insight but can take away control of the business.
- Prepare and use a cash flow forecast.
- Let vendors help finance your business. Negotiating payment terms for your goods helps you to finance your business.
- Use inventory management strategies.
- Take advantage of prompt payment discounts.
- Meet your obligations and protect your credit rating.
- Communicate with vendors ahead of time if you find you may not be able to meet your payment terms on time.
- Invest idle cash balances.
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