Running a small business is equal parts rewarding and risky. About 20% of small businesses fail in their first year, and about 50% fail within their first five years. While there are many reasons why small businesses fail, cash flow is number one on the list.
Protecting your finances is pivotal for pushing your business beyond the five-year threshold. The question is, are you doing everything you can to optimize your business’s financial position?
In this article, we will explore the savviest financial tips to help businesses just like yours boost cash flow and succeed long-term. Get ready for some game-changing advice! Let’s dive right in.
Don’t DIY Your Accounting
It’s tempting to do your own accounting.
After all, it will save you money…right?
The truth is: it won’t. Accountants do much more than keep your books in check. They have the tricks of the trade to help you with budgeting, planning and, ultimately, making better business decisions. There’s a reason why it takes four years to become an accountant – it’s not as easy as it looks! Keeping track of income, assets, liabilities, cash flow, and investments should be left to a qualified accountant.
Your business needs your attention. Trying to juggle your accounting on top of your day-to-day responsibilities will lead to bookkeeping and tax compliance errors, both of which have significant financial implications. Stay out of trouble with the taxman and team up with an accountant.
Choose Your Debt Wisely
Most businesses require a loan to get off the ground and keep things running smoothly. Whether you need a little cash flow boost or you’re looking to expand your business, a loan is a fast and cost-effective way to acquire the cash you need when you need it.
While debt is often par for the course, it’s important to research loan options, terms, and interest rates. Whether you choose to secure a loan with a major bank or an alternative lender, you need to be sure that you’re not jumping into something you can’t repay.
There are several safe ways to secure a loan for your business, including:
Bank Loans
Major banks offer a variety of business loan options and competitive interest rates. However, banks have stringent rules for lending to small business owners, particularly those just starting out. Banks want to know what a loan is for – i.e. working capital, equipment, franchise startup or line of credit – which allows them to set specific loan terms and lend accordingly.
Small Business Administration (SBA) Loans
The SBA partners with lenders in the US to help small businesses with operational costs. By reducing the risk for lenders, the SBA makes it easier for small businesses to get a loan. Like major banks, the SBA has eligibility requirements for accessing a loan and business owners must prove they can make repayments.
Alternative Lender Loans
Alternative lenders are known for their fast approval and limited restrictions. Although it’s easier to acquire a loan from an alternative lender than a major bank, there’s often a catch: alternative lenders commonly impose high interest rates on their loans, so it’s essential to read the fine print when borrowing from an alternative lender.
Personal Loans
Many entrepreneurs take out a personal loan to kick-start their business. Unlike other loan options, which require details of your loan purpose, a personal loan can be used for anything. This is a great option for business owners who want to jump through fewer hoops to secure a loan. While you can’t borrow millions, a personal loan could give you the cash you need without having to justify what you need it for.
Spend With ROI In Mind
Expenditure is unavoidable. However, spending with ROI in mind is key to long-term business growth. Whether you’re purchasing new equipment, upgrading your computer system, moving premises or staff training, spending is a necessary part of running a growing business.
However, it’s crucial to plan expenditure around the return you expect to get from it. Doing this avoids using precious cash flow on irrelevant spending and ensures each investment pays off.
Optimize Your Tax Position
There are few things more distressing in business than an unexpectedly large tax bill. Doing everything you can throughout the income year to offset your tax bill is one of the most effective ways to free up cash flow.
So, what can you do?
Claim Your Expenses
Running a business can be expensive, but most expenses are tax-deductible. Document all your expenditure to make sure you can maximize your deduction. There is a wide variety of tax-deductible business expenses. The most common include:
- Mortgage interest
- Rent or lease payments
- Business vehicle maintenance and fuel
- Travel and accommodation costs
- Medical expenses
- Office supplies and stationery
- Utility costs
- Legal fees
- Accounting fees
Make Charitable Donations
Being a charitable business is good for the community. It’s also a good way to reduce your tax bill. Charitable donations are tax-deductible, incentivizing companies to dig deep and give back.
Apply For A Payment Plan
The IRS offers an instalment plan for business owners with a tax bill of less than $50,000 and can’t pay the full amount immediately. With IRS approval, business owners can split the total into monthly instalments. Instalment plans and alternative payment plans help business owners avoid a large tax bill and free up cash flow throughout the year. Many countries have adopted instalment plans as a progressive approach to managing business tax, with New Zealand’s tax pooling system leading the way. We can only hope the US follows suit.
Stay One Step Ahead
Planning for your future gives your business a better chance at having a future.
Setting financial goals and forecasting expenditure is essential for sustaining business growth and creating an optimistic long-term plan for your business. Forecasting is a team effort between you and your accountant to create projected income statements, balance sheets and budgets.
Financial forecasting sets a benchmark for revenue potential that is both realistic and feasible. However, it also allows you to prepare for the unexpected. As we’ve seen with COVID-19, the unexpected can happen at the drop of a hat and businesses without a contingency plan have struggled to stay afloat.
Final Thoughts
Your business’s financial situation is the number one determining factor for success. The above financial tips dramatically improve cash flow, opening up investment opportunities and providing an emergency buffer for challenging times. With clear business objectives and some financially savvy planning, your business should be fighting fit well into the future.