Keeping track of financials while running a small business often feels like an overwhelming task. Whereas keeping daily operations afloat, creatively strategizing, managing personnel, finances often fall on the wayside. This has a tendency to be a fatal mistake for many small businesses.Financials are what dictate the rest of your business, and plans for growth and expansion are inextricably linked to a company’s cash flow and revenue stream.
Eight Finance Tips To Keep You On A Trace
Build an emergency fund
According to financial planners, a general principle of the thumb is to have three to six month’s worth of living expenses (after taxes) in an emergency savings fund. You need to be prepared for an emergency. And if you own a business, you may want to have an even larger emergency fund, just if your business takes a downturn or if you have seasonal fluctuations in cash flow.
Ask yourself what you would happen if you lost your biggest client and had to take a pay cut? Then, how long would your personal emergency savings last? Note you should not be risking your emergency fund in the stock market or even locking it up in long-term CDs. Keep it in an FDIC-insured cash bank account. You are not trying to make a big yield from this money- you simply need it to be there if you have an emergency.
Having an emergency fund will provide you greater peace of mind to be able to make more confident decisions for your business. You will be in a better position to focus on operating your business if you know that your family is protected if you happen to have a financial emergency (medical bills, natural disaster, major home repairs, and car accidents).
Save for retirement
Small business owners frequently invest a lot of their profits back into their business; however, there are also some great alternatives for small business owners to save for retirement. Contemplate setting up a SEP IRA or other tax-advantaged retirement savings program for your business, even though you do not have any staff. Based on your income and qualifying factors, you might find you can save more money for retirement as a self-employed person than you can as an employee.
Rather than investing all your profits back into your business, savings for retirement can assist you in diversifying your savings into a wider array of investment alternatives: EFTs, bonds, stocks, and money market mutual funds. Your company is already your biggest investment. You already are dependent on your business for insurance and income. You do not have to invest all your money into your business; invest in a broader range of opportunities, too.
Manage your personal credit
Credit is like the backbone of a small business, and you need to ensure your personal credit is also solid. Remember to pay your bills on time. Even though money is tight and you can only afford to make a minimum payment on a credit card, it is better to do that than to miss a payment or pay late. Also, do not forget to pay attention to your credit utilization ratio- the percentage of your available credit limits that you are actually borrowing at any given period during the month. If you can maintain this ratio below thirty percent, this will assist you in having a better credit score and an easier time qualifying for personal loans. Having better personal credit can also be useful for your business, particularly if your business is still establishing credit under the business’s name. Besides, staying on top of your debt payments and due dates will assist you to have a stronger foundation for your personal finances.
Invest appropriately for your risk tolerance
After you are saving for retirement, ensure you are investing in a diversified portfolio of assets that are right for your risk tolerance and time horizon. If you are still comparatively young and have various decades until you reach retirement age, you should invest your portfolio mostly in stocks.
For instance, an old principle of thumb for asset allocation used to be that you should take 100 deductions for your age, and that would be the percentage of your portfolio that should be invested in stocks. So if you were forty years old, to calculate your portfolio, you would deduct forty from one hundred, and the result would be investing sixty-percent of your money in stocks, forty percent in cash and bonds.
Nonetheless, based on your investment goals, you may want to invest an even larger portion of your portfolio in stocks, so you can get more of their potential long-term growth until you retire. Stocks can be risky, but they typically offer the best potential for long-term ROI.
Pinpoint your strengths, and use those to grow
Often, businesses fall victim when they try to exceed everything. Growth and expansion are tremendous, but they require sustainability. This indicates understanding what your limitations are, and what areas your business excels in.
Work to improve your limitations; however, build on your core strengths. Use them as a foundation and allocate resources and revenue accordingly. Rather than wasting time and money into activities that do not directly benefit your business, invest wisely. Work to develop and lasting ties to those services and staff that assist your business to be as successful as possible instead of constantly looking for the next new thing.
Never be afraid to ask
Whether it is asking for a discount from a vendor, or just reaching out to clients and customers- do not be afraid to ask for work, particularly if finances are tough. Based on the approach, most appreciate the honesty that comes with just asking. The key is to try to stay away from being demanding and pushy, but having a frank conversation and taking things from there. It also shows that you are committed and serious about working with what you have and making that relationship better, which is appreciated by many.
Your work life should not be your only life
This might feel counterproductive- after all, if you are not putting tears, sweat, and blood into your business, will it really be successful? The answer is yes. Whereas in the beginning, it might appear necessary to put in massive amounts of effort to keep your business profitable; however, that should not be a long-term practice. If, after some time, your business still needs that much effort to run, then it indicates that something is terribly wrong with your finances. Because if you stop putting in the effort, then your business might not survive, and that is not at all the way it should be run.
Not only is sustaining a business practice like that unhealthy from a health and personal perspective, but it also means that there are deeper issues within the business. Moreover, consider the quality of the time you spend instead of quantity as a benchmark for success. You can spend eighty hours weekly in your office, but if only half of that is spent doing productive work, then it is time to reconsider how you budget your time.
Seek professional assistance
Speak with a financial adviser for more specific advice. This column does not compose professional financial advice, but it aids to contemplate some of your alternatives so you can make informed choices about your personal finances.
If you can improve your personal finances- with a diversified portfolio, solid emergency fund, strong personal credit- you will more likely focus on running your business with a calm mindset. And most business owners, who are some of the busiest people around the globe, having peace of mind about personal finances can be priceless. Typically, these are just a few simple financial tips that yield great rewards if adhered to.