You don’t need aggressive growth plans to benefit from making your business more financially stable. In fact, some subtle financial tweaks often yield the most significant results.
Here are six financial shifts all small business owners should make to build a stronger business foundation.
1. Establish a business credit history. When your business has a credit history that is separate from your personal credit history, you minimize the risk to your own personal assets. A business credit history also means options, should you one day want to take out a business loan to expand operations, buy equipment, or borrow against the assets in your business.
If you don’t already have a business bank account, open one in your businesses’ name. If that financial institution offers business credit cards, apply for one—but do not allow your personal social security number or personal credit history to play a role in the approval decision.
If you cannot get approved for a business credit card just yet, consider opening a credit account with vendors you buy from regularly (like a shipping facility, or office supply store). Over time, the vendor account can help you establish a credit reference that may help you get approved for a business credit card, loan, or financing.
2. Take your financial temperature each month. You’ll make informed businesses decisions (and probably lower your stress level) by knowing where your business stands financially, at the start and end of each month.
Learn the meaning of these basic financial terms. All are important measures of any small businesses financial stability, opportunities, and areas of vulnerability:
- Net income (what you make after expenses)
- Gross margin (percentage of revenue you make after expenses)
- Fixed costs (which don’t change monthly)
- Variable costs (expenses that do change)
- Debt (what you owe)
- Leverage (debt you can borrow against)
- Capital expenditures (what you buy to support future business)
- Concentration (how much of your business comes in from clients your top clients)
3. Establish payment policies and processes. If you sell directly to customers, ensure you’ve clearly provided the customer with your policies, in writing. The more specific you are in your policy description about returns, exchanges, merchandise credit, price adjustments, defective merchandise, and returned checks the better you can protect your business against the risk of lawsuits, unhappy customers, and their unexpected financial ramifications.
If you sell to other businesses, provide new clients with a document explaining your invoicing and payment policies, including when and how invoices are issued. Define the exact due date for payment, and which forms of payment you accept. Address how late or unpaid accounts are handled.
4. Establish baseline thresholds for your cash flow. Dun & Bradstreet estimates that 90% of small businesses fail for financial reasons. Most often, those issues are due to a shortage of cash. Particularly in your first few years of being in business, you may not have a sense for how seasonality, trends, and competition will impact your business. Unexpected expenses like taxes, costs of hiring employees or carrying inventory you can’t sell can weigh on your finances, too. Establish a threshold for how you’ll maintain cash flow (which may include borrowing at low interest rates when it makes sense), before these events happen.
5. Stay aware of your financial surroundings. Stay in touch with the broader financial environment. Changes in interest rates, lending options, investment opportunities, global stock market activity, tax laws, trade policies and even government elections can all have impacts on small businesses. The more you know, the better you can prepare for what the future holds.
6. Establish a retirement account. Establish a small business retirement plan, like a SEP-IRA, a solo 401 (k), or a SIMPLE-IRA. They have different contribution amounts, features, and levels of complexity, but all provide a way for you to make pretax contributions to retirement, and the money you invest into the retirement account can grow tax-free. If you hire employees and want to contribute to their retirement as a workplace benefit, the amount you contribute is also a qualified business tax deduction.
