While launching and growing your small business, you may not consider yourself a financial expert. However, learning how to manage your business’s finances accurately and regularly is essential. In this overview, you’ll learn the simple steps that you can take to improve financial management strategies for your business success.
Why proper financial management is essential
At the core of owning and running a business, there’s a single truth: Businesses that don’t have proper financial management strategies will struggle and potentially even close. That’s because:
- If you don’t have enough working capital to maintain operations through the early startup years, increasing and unexpected expenses can hurt your business.
- If you’re not bringing in enough revenue to cover all expenses with some margin left for profitability and growth, your business likely won’t be sustainable in the long run.
- Even if your business becomes a revenue-generating machine, if you’re not on top of your financials, runaway expenses, or any unpaid taxes and insurance, you can still lead to financial distress.
The good news is that with some time and care for your financials, you’ll set your business up for success.
What are the financial management strategies for business success
By following these steps, you’ll be on track to a stable financial foundation with the ability to reach higher and thrive:
1. Start small
When you’re starting out, it’s essential to focus. Part of the challenge is enhancing your available resources and securing financing, without taking on more debt than you can handle or ending up with predatory debt.
Use funds you can access as your owner-equity investment, like personal savings or loans from family and friends. This will form the basis for your business’s financials. Spend time strategizing ways to maximize the impact of this core financing.
2. Prioritize financial management from the start
Even if you have a bookkeeper, certified public accountant (CPA), or chief financial officer, it’s important that you understand the basics of good financial management. Put systems in place now to track income and expenses closely so that as your business grows, you can ensure that funds are used effectively.
3. Create a business budget and stick to it
Create a detailed budget that outlines your expected revenue, expenses, and profit margins. Identify the necessary resources for operations and plan for uncertainty to avoid financial surprises.
4. Understand overhead costs
Expenses such as rent, payroll, and inventory tend to rise over time. Without checking these, they can quickly drain your resources. For example, a common issue is that as a business grows, you’ll hire more staff instead of seeing how responsibilities and skill sets can be realigned. Before committing to these changes, assess whether they align with your revenue and expansion goals.
5. Define your goals for growth
While one restaurant owner may dream of eventually franchising, another may want a single location that thrives. Defining what you want helps you make wise financial decisions that support business success.
6. Plan within your means
For some businesses, owner equity may be enough to launch and operate for the early stages or even for years. For others, you may need additional financing to create the business you want. When more funding is needed, be sure to look for loans with beneficial terms from a responsible and trustworthy small business lender.
7. Focus on profitability, not just volume
If your products and services don’t consistently generate a profit, then it doesn’t matter how stellar your sales volume may be. The ultimate goal is to maintain a healthy profit margin.
8. Scale carefully
Expanding too quickly can strain your resources and lead to failure. Your growth should be strategic and supported by sound financial planning. It’s better to have one highly profitable business than multiple locations or projects that barely break even.
9. Seek professional guidance
Work with financial advisors, accountants, or nonprofit lenders to help you make informed decisions and avoid common pitfalls.
Implementing these tips and good financial habits creates routines that allow you to stay on top of your financials to ensure business success.
How much working capital do you need?
Working capital is the leftover money after you pay off all your current liabilities with your current assets, and it shows if you can meet your financial obligations. Having enough working capital is essential, but you may not know how much working capital you need.
When determining your working capital needs, your calculations will be either positive, break-even, or negative working capital:
- Positive working capital demonstrates that your business can cover expenses and still have funds set aside for the unexpected.
- Break-even working capital shows that you have just enough funds on hand to cover your expenses.
- Negative working capital means your business may be unable to cover key expenses, including inventory, payroll, suppliers, and more.
It’s also important to know that working capital fluctuates over time. Due to seasonal cycles and other business norms, it can be positive one month and negative a few months later.
Do you need working capital to start your business?
Every business needs working capital, but it’s not a one size fits all. The amount of working capital you need can change from season to season and year to year. The key is to have enough on hand to pay your essential expenses and leave you with some profit.
For most startups, it’s wise to explore lower-cost ways to enter your market before committing to high expenses like commercial leases or inventory. This also keeps your working capital needs down simply because day-to-day costs and overhead are lower.
For example, if you want to open a restaurant, consider starting small by selling your food at farmers’ markets, fairs, or as a caterer. These options have lower startup costs and allow you to test your menu, build a loyal following, and refine your offerings. Once you’ve proven demand and built a foundation, you’ll be in a stronger position to invest in a physical location.
Eventually, most small businesses will benefit from a working capital loan to support long-term goals and smooth out cashflow cycles.
Pursuit supports business success with working capital loans and more
Managing the financial health of your business is about balancing income and expenses to support profitability, financial strength, and sustainable growth. Even still, most businesses experience cashflow cycles and strains on working capital from time to time.
Pursuit is a leading small business lender serving businesses across New York, New Jersey, Pennsylvania, Connecticut, Nevada, Illinois, and Washington. We offer loans and a line of credit for working capital, commercial real estate, equipment, and much more.
We’ve helped thousands of small business owners get the funding and support they need to achieve their goals and dreams and we can help you, too.
Contact us today to learn more about ways we can help.
