9 Definitive Ways to Improve and Manage Your Small Business Finance

Here's how you can manage your small business finance and improve your startup's financial position.

Growing a startup or a small business is tough.

There are so many things that can go wrong and only a few that can go right.

You need to be very considerate about spending money, ensure that you can raise money when the need arises, as well as ensure that your business has an optimal working capital balance.

And that’s why managing your small business finance well, is a very important trait that entrepreneurs must have.

That being said, in this post, I am going to show you how you can better manage your small business finance as well as improve your startup’s financial condition.

So, let’s get started!

#1. Get Rid of Excessive Stock

Try to keep your startup as lean as possible. A small business’ finances are in the best shape when it uses its resources in a more optimal fashion than its larger competitors.

Alex Wan, the co-founder at Vinpit feels excessive stock can strain cash resources, while insufficient stock might result in lost sales and weakening customer relations. Managing optimal stock levels is the best approach as the company risks losing sales due to a material shortage. Periodic inventory checks help keep track of various stock levels and alert finance to any recurring overstock or understock issues.

Here’s how Alex manages it –

“Consumer demands changed significantly due to the pandemic which has seen a change in how I manage my working capital for my business as well. For my small business, although odd, I resort to emergency loans as a short-term solution for managing working capital if I run out of options.

Although this isn’t recommended as I have learned over time, I’ve seen it as a lifesaver for my small business since these loans are always available on demand.

This strategy suits my business because small businesses can easily hit a snag trying to strike a balance in budgeting which renders such a strategy significantly indispensable.”

 Too much stock and inventory can negatively affect your small business finance.

Nathan Hughes, Marketing Director at Diggity Marketing shares her belief in reducing inventory size and increasing the inventory turnover. A less established inventory always helps in freeing up the cash flow. Sharing financial information, observing capital performance, ensuring adequate financing, and engaging employees helped them manage their business finances including their working capital.

Getting rid of excessive stock and investing the same on fixed assets and capital is a sentiment that is shared by most business owners as is the case with Farhan Advani, Director Marketing of Buy Here Pay Here.

#2. Ensure your payments and debts are on-time

Not keeping track of your due payments can be a huge drag on your business. You do not want those high interest rates of course!

Well, some startups often try to delay their outflows so as to improve their working capital situation. However, this may not be an optimal solution in all cases.

Mike Thompson, from Hyperlend feels that by paying your suppliers on time and managing your debtors efficiently, you can ensure that there is enough finance at hand or available.

 Delaying your payments can affect your small business finance.

Also, business owners and CEOs should check the credit terms to ensure if the credit that is being offered to debtors is suitable for your company’s needs. Moreover, if you wanted to reduce and control bad debts, you should always have the time to check and ensure that effective credit control procedures are being followed.

Samantha Moss, Editor & Content Ambassador at Romantific also stresses on this point.

She considers on-time invoice and balance inventory ratios as essentials for managing her business’ finance. These two eliminate payment delays and reduce excess inventory, beneficial to increase savings, receivables, and profitability growth.

Aside from that, it ensures an effective control with credits or other resources, which brings advantage with cash cycles. She considers on-time invoice and balance inventory ratios as essentials for managing her business’ finance. These two eliminate payment delays and reduce excess inventory, beneficial to increase savings, receivables, and profitability growth. Aside from that, it ensures an effective control with credits or other resources, which brings advantage with cash cycles.

Dan Belcher, Founder, and CEO at Mortgage Relief tries to properly manage debtors by examining all credit conditions and contracts to ensure that they will not negatively impact my cash flow. He also verifies that his clients’ credit control procedures are followed to prevent the company from having bad debts.

Dan feels that debtor obligations are significant because they have a direct impact on capital because assets and liabilities should be in line.

#3. Avoid Wastage at All Costs!

  Wastage can drain out and bar you from managing your small business finances.

The problem with most American businesses is that they like to splurge. Not being cost conscious can severely affect your cash flow in the long run.

Andrew Johnson, CEO of Prime Seamless shares – “The more cost-effective solutions I come up with help me head one step closer to sustainability. I prefer to use the leftover fabric in new designs and create a masterpiece. It has proven to be quite fruitful for my startup, as customers like the unique ideas.”

Conservative working capital management is also a preferred route for several small businesses to improve their financial standpoint.

Sonya Schwartz, Founder of Her Norm says –

“As a CEO, I can say that a conservative working capital strategy is a safer place to go. In this time of huge uncertainties, having assets in high amounts can help in aiding the business to survive difficult times. Thus, this kind of strategy may be considered a good one during this pandemic.”

Ilya Cheremnikh, Founder of Culture Yard also follows a conservative financial planning. At his company, Culture Yard, he tends to keep a healthy cash reserve and his goal is always to have 6 months ahead of salaries. He is also quite frugal in the investments that he conducts for his business and whenever possible, he prefers to work with professional freelancers rather than increasing his full-time overhead to have more flexibility in cash management and hiring.

#4. Use Electronic Payables and Receivables

 Going electronic on your payables and receivables can help you save a lot on your startup's finances.

Nathan Hughes, Marketing Director at Diggity Marketing also shares that his business is trying to incorporate electronic payables and receivables, for it significantly amplifies the turnover for any company.

#5. Set the Right Metrics and Follow the Right Numbers

Choose the right KPIs to measure and set target metrics. Well, this is because any company’s driving factor in managing their small business finance comes with assessing the target metrics set.

April Maccario, founder at AskApril shares – “To better perform this management, ensure that you choose the right KPI to measure and set target performance metrics. You can measure working capital KPIs quarterly or monthly, assess performance next to competitors and industry-leading organizations, utilize benchmarks, and set targets for efficient, higher working capital.”

#6. Be Aggressive with Your Working Capital if You Can Manage It

There is no one-size-fits-all business strategy. While some people prefer being conservative with their business finances and their working capital, some can manage the complete opposite strategy. This is a matter of your own comfort as well as how much financial expertise you have.

For example, Stephen Curry the CEO of CocoSign, a digital signature service provider, prefers using an aggressive strategy with his working capital to maximize profits, although it’s riskier when compared to other methods.

In his words – “An aggressive strategic approach suits my business since it allows me to gain higher profits by saving on interest costs. The strategy will enable me to utilize and invest the business’s long-term funds to finance fixed assets and the permanent working capital (PWC).

Additionally, we use short-term funds to finance both PWC and temporary working capital (TWC) in this approach.”

#7. Improve Liquidity in your Financial Position

 Higher liquidity can help you manage your small business finances more safely and from a more secure standpoint.

Yousun Allen, CEO at Yosun UV Printer states that organizations may guarantee that enough cash levels are accessible for any prospective incoming opportunities or unplanned events by acquiring a continuous high level of working capital.

It also allows businesses more control over how they operate their businesses, allowing them to fulfil client orders, expand, and invest in new goods more quickly.

#7. Small Businesses Should Try and Reduce Unnecessary Debts

Melissa Macalinao, Project Manager, and Operations Manager of The SEO Mama Agency, shares her insights –

“Our working capital strategy is to ensure that we have ample cash in hand to support our business needs as well as reduce the debt levels for the business. We have chosen this strategy as we do not want to burden our business with debt and be a slave of the banks.

Get rid of your unnecessary debts so that you can improve your business' financial position.

In addition, we want to ensure that our cash flows are strong enough so that we are able to manage any fluctuations in our business.

We also have a pretty simple strategy of buying inventory as far in advance as possible. We do so by spending a portion of our monthly revenue on inventory. We also keep a certain amount in the bank which we can draw from in case we need more inventory.

This ensures that we always have enough inventory without having to worry about our cash flow. The reason for this strategy is that it helps us manage our cash flow and gives us a cushion in case the markets change suddenly.”

#8. Ensure that Your Working Capital is on Track

 Manage your business working capital to improve finances.

While we do have a guide on managing your business working capital, we got Martha Sullivan, a CPA, family business advisor, and certified exit planner and business value growth strategist and President of Provenance Hill Consulting, LLC sharing her insights in this regard –

“Working capital (WC) is one of the most critical measures and tools used when a business is being sold.  The WC target is aggressively negotiated in a sale, so the calculation and management of working capital takes on greater importance.

Most M&A transactions have a WC target written into the offer and purchase agreement.  Its purpose is to ensure that there is no gamesmanship prior to close and the buyer is steps in with reasonably solid working capital levels to smoothly continue operations post-close.  If the target is met on the day the transaction closes, life is great. 

There is no risk to the purchase price, and, in fact, the seller gets the overage.  However, if the seller misses the target, the purchase price is cut to the extent of the missed target.

Why should the average business owner or leader care if they have no intention of selling right now?  Two reasons:

#1. Negotiation of working capital targets start based on the preceding three to five years’ historical averages.  If a company routinely operates with more than adequate or excessive working capital levels, the target could be set higher than is necessary.  It’s challenging to convince the buyer that an excess was maintained “just because.”

#2. There are more business owners considering exit than ever before.  A recent survey out of New York suggests that employees are not the only ones ditching the job.  According to the Exit Planning Institute’s (EPI) 2021 New York State of Owner Readiness survey,71% of business owners plan to exit their within the next five years..  92% plan to be out within 10 years.

This survey has been done across the country over ten times.  The New York survey, however, is the first since the Pandemic. 

These statistics aren’t surprising if you assume most of the respondents were Baby Boomers, as was the case in prior surveys. 

But they were not. 

88% of the respondents were under the age of 50.  As the M&A market shifts from the current sellers’ market to a buyers’ market, a seller’s demonstrated financial discipline will be a significant competitive advantage upon exit. 

Working capital management is a baseline discipline.”

#9. Automate Your Finances

 Automate and streamline your finances to improve it.

Deepasha Kakkar, Founder / CEO of Crackitt utilizes the automation process for her financing requirements.

According to her it has been like night and day since the switch from paper to electronic transactions. Managing business financing operations manually, in her experience was time consuming, inaccurate, costly, and prone to errors.

Additionally, acquiring specialists incurs additional costs and becomes far more difficult when key personnel abruptly resign.

However, automating processes saves money and reduces the risk of mistakes which can improve cash flow. It may sometimes require you to outsource employees to facilitate the process of invoicing and such, but this proves to be much more cost-effective than hiring specialist individuals in the long run.

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author avatar
Adhip Ray
Adhip Ray is the founder of WinSavvy. He has a legal, finance and data analytics background and has provided marketing consultancy to startups for over 5 years. He has been featured at multiple publications in multiple niches including HubSpot, Addicted2Success, Manta, FitSmallBusiness, Databox, IndiaCorpLaw, Bar and Bench and more!

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