You have a business idea, and you have found out that private lenders like Mango Credit can provide you with small business finance options. With your capital secured, you’re now ready to turn your concepts into reality.
However, before you dive into business, it’s wise to invest in gaining a greater understanding about how business finance works to both help you determine how to manage what you’re earning and spending, and importantly, to help avoid getting into a ‘cash flow crunch’ – meaning becoming strapped for cash.
Here’s an overview of some small-business finance top tips to consider to help you start (and stay) on the right track:
1. Separate personal and business finances
Differentiating between personal and business finances has many benefits. Firstly, having two separate accounts, rather than using the same for personal and business purposes, helps establish your business credit. This is important if your business ever requires credit for working capital or other business-related reasons, as it’s difficult to provide an accurate overview of your assets and liabilities if your finances are blended. Consequently, establishing your business credit can be challenging if finances aren’t separated – which means you may find it harder to get funding with competitive rates and terms.
Separating funding is also a ‘cleaner’ way to distinguish between business and personal expenses, making tax time much more straightforward. This is because a separate business account makes it easier to keep track of business incomings, outgoing and corresponding expenses versus profit.
2. Prioritise accounting, bookkeeping and recordkeeping
Accounting, bookkeeping, and recordkeeping are essential to keep your business financial health on track, plan for future growth and even ease the burden of tax season.
It’s very common for business owners to be terrible at recordkeeping. While this seems like a low priority function, it’s critical to have accurate and on-time recordkeeping to ensure proper bookkeeping and accounting can occur.
3. Bookkeeping involves accurately and regularly tracking your transactions (both expenses paid and sales made).
An accountant helps interpret your financial information and advise which parts are doing well or not. An accountant also can provide advice on your cash flow and give guidance about growth plans, as well as where the possible ‘red flags’ are. Meanwhile, recordkeeping makes bookkeeping and accounting possible by organising all documents needed.
4. Learn your tax obligations
In Australia, all businesses are required to pay taxes to the Australian government, state and territory governments. But tax obligations vary according to several variables, including the business type, structure, and turnover. Common taxes to be aware of include company (income) tax, capital gains tax (CGT), goods and services tax (GST), payroll tax, land tax and fringe benefits tax (FBT). Learning about these taxes can help you know what applies to your business and how they can impact your company. Again, an accountant is well-positioned to advise you of the respective taxes (as well as small business tax concessions and write-offs that you may be eligible for).
5. Create a budget
Business finances must be managed effectively to help prevent a cash flow crunch. A key to this is having a budget that includes all anticipated income or revenue sources, the available capital, and possible expenditures within a specified period. With such essential information, a detailed and realistic budget can guide the business is operating within your means and managing unexpected challenges. This should also be reviewed regularly, again, in conjunction with your accountant.
6. Make a good billing strategy
The business cash is tied up to your accounts receivables. If there are too many unpaid invoices, the business may experience cash flow problems. Managing cash flow by improving the billing process helps the business to run smoothly.
It’s wise to be proactive. If your business has a client that’s consistently late on their invoices and payments, or you’re struggling to collect from certain customers, maybe it’s time for a different approach. A good billing strategy or improvement may include automation, defining of billing cycle and utilisation of user-friendly online portals. You might also consider changing your payment terms and being on the front foot with any late payments by getting in touch with the respective clients or suppliers straight away.
7. Track your expenses
In a business, tracking expenses is important, not just to create an organised record for tax season. It also helps control costs by knowing how much you’re actually spending (versus what you think you’re spending and what you’re spending your money on. Tracking the business expenses also lets you know if you’re over or under your monthly budget. It’s important to make adjustments straight away if you start to overspend in relation to your turnover (i.e. you’re spending more than you’re earning).
8. Keep a good business credit
As your business grows, you may want to take out loans to fund expansion and other business-related activities. Keeping a good business credit helps you obtain business financing quicker and easier when you need one. Having good credit means it’s easier to qualify for a loan with more competitive rates and terms. Additionally, it protects your personal credit score.
Running a business is not easy. But, if you have a business, financial knowledge can make a huge impact on managing your financial assets properly. We hope these tips help you better understand your company’s financial health and support your future decisions.