— October 24, 2017
Having a great idea and running with it is not enough to operate a successful business. A business owner must wear many hats when operating their company, but managing and understanding their finances doesn’t always come easily.
Relying on a business manager or an accountant is a beneficial way to verify that you are conducting your finances by the book, but many small business owners do not have the budgets to afford these specialists. In fact, “40 percent of small business owners say they are financially illiterate – yet 81 percent handle their business’ finances themselves,” according to an Intuit study as reported by one source.
Whether you will hire out or want to tackle your business finances yourself, it is necessary to have a basic understanding of your financial situation if you truly want to be in charge of your business. With a little effort, it is not difficult to increase your financial literacy with these tips:
Know What is Required to Run a Business
Bloomberg reported that 80 percent of businesses fail in the first 18 months, states a source. Much of that failure is due to the fact that business owners are not skilled in properly handling their finances. There is a lot of financial planning and management required to operate a company, such as “budget, accounting and taxes, calculating price points, and projecting revenues and success rates well into the future to ensure continued success.”
Some owners get into trouble because they don’t plan ahead, and don’t save for unexpected expenses, such as hiring additional staff, surprise incidents that may arise, or the simple costs of doing business they may not have been aware of. Others don’t know payroll and tax rules, and receive heavy fines for paying late or not at all.
As a small business owner, it is imperative to understand all of the financial requirements to run a business!
If Borrowing Money, Do Your Research
It can be tempting to borrow money from a bank or an investor to start or grow your business, and this can help you get off the ground. Before you jump into the world of lenders, take time to evaluate your own expenses and savings and calculate what you can afford, or if it would be possible to provide your own seed capital, a process called “bootstrapping.”
Although using your own funds can involve some risk, paying high-interest rates can be harmful in the long run if your cash flow can’t afford it. If you do choose to borrow, make sure to compare the terms and interest rates that lenders and investors are offering, as well as research their credibility and history.
Learn Proper Financial Planning
Financial planning is essential to secure your company’s long-lasting success. Startups require substantial seed capital to cover expenses for the first few years. Few startups are profitable right away, as all the money is typically reinvested in business growth for hiring staff, marketing and inventory.
You must have a comprehensive understanding of your monthly expenses and profit. Small business owners who hire accountants typically cannot understand complicated accounting reports, so it would be advantageous to track expenses, profits and bank account balances themselves to stay on track, according to personal finance expert, Andrea Travillian. Truly understanding your monthly expenses will help you save for them rather than spend your profits as they come in, leaving you in a lurch when the time to pay bills comes around.
Save a portion of your monthly profits to pay for taxes; business owners who do not get in the habit of doing so can be pushed to declare bankruptcy when a significant amount is due from the IRS that they did not budget for.