It is widely recognized that poor financial management is one of the main reasons why new businesses fail. In fact, one study even showed that 82% of businesses that fail attribute their failure to poor cash flow management.
As such, small business owners must be more concerned than ever about how to appropriately manage their cash flow. Learning to do so takes time and effort, but with the right guidance and tools, managing a business’s finance can be much less intimidating.
The Power of the Revenue Sheet
One fundamental tool that small business owners must learn how to use in their finances is the revenue sheet. Although filling out a revenue sheet can seem tedious — and can be challenging to learn — this single tool has the power to provide astounding insight into the business’s efficiency and functionality. A revenue sheet factors together a business’s income and spending, allowing the owner to see a comprehensive picture of its financial health.
With revenue sheets, business owners can break down and categorize where all the money coming into the business goes back out. It’s important to know how much money is spent on payroll, operating and maintenance expenses, taxes, and marketing, among other categories of essential spending, to keep the business running smoothly. Many of these expenses are immutable, so failing to plan adequately to pay them could spell doom for a company.
Revenue sheets are also important because they give businesses a better idea of their profit or loss and how much they have to budget in their forecasts. This tool can be pivotal in allowing business leaders to find a solution to whatever obstacles may be weighing down their company’s success. For example, if a business is overspending on building maintenance, it might be worth looking into a more modern facility, as the increase in rent might be offset by the reduction in upkeep costs.
How Lack of Planning Is Detrimental to Your Business
Without accurate revenue sheets, however, a business owner cannot put away meaningful money for anything, allowing the business to rapidly grow into an insatiable cash-eating monster. Traditional wisdom says to only use money on things you need, but that doesn’t mean to use money only when you need it. Planning for worst-case scenarios, such as equipment malfunctions, will ensure you are prepared to handle these expenses when they arise. In other words, the best philosophy is to expect the unexpected.
One of the biggest mistakes a small business owner can make is not knowing how much to pay themselves or take from the company’s funds for expenses, since this can lead to financial inconsistencies. Some small business owners think they can get a paycheck one month and then just not pay themselves the next month if they have to use that money to repair an important piece of equipment, but this is simply not a sustainable way to run a business.
When business owners make this mistake, they often pay the price themselves. Poor budgeting means the business owner is left scrambling for money, and the most common source to alleviate that immediate pressure is their personal funds or — worse yet — taking out business or personal debts to make up the difference. Although entrepreneurship is a game of measured risks and sacrifices, the easiest way to minimize these risks is by having strong budgeting and financial planning in place.
Putting Aside Money in Your Business
One simple strategy that many startups don’t realize can be effective is the “grandma’s envelope theory,” which was popularized by Dave Ramsey. Using physical cash and envelopes to organize and divide one’s money is a great way to manage spending in personal finances. While some adaptations must be made to use this method on a larger scale — like managing a business — similar principles can apply. Small business owners must find a way to better visualize their cash flow and use that information to manage their expenses.
However, it is also critical to remember that the finances of a business will change over time based on its evolving spending needs. Several factors influence a company’s spending needs, including its age, size, industry, and more. For example, as a business scales, it’s important to have more office space to handle a growing workforce, so the business owner will need to budget more money for rent. Likewise, if the business owns its office space, maintenance costs will likely increase year after year as the facilities age and utilities rise in cost.
Managing finances as a new small business owner can seem intimidating, but the key to success is to bring it back to basics. Business leaders must remember the tried-and-true methods that help understand where their money is going, how much of it needs to be spent, and where it is best used. Knowing these core concepts is necessary to make an effective budget and plan for any obstacles that may arise.