Building on the momentum of the last few years, the new decade holds tremendous promise for small businesses. But business owners who have been in business for any length of time understand that there will be peaks and valleys along the way. Whether your business is just out of the starting gate or celebrating its 20th anniversary, its financial health will dictate your chances of success. It may not be the reason you started your business, but working on the financial wellness of your business could be the most important thing you can do.
Here are some tips and areas of focus that can ensure the optimal performance of your business during good and bad times:
Build Your Emergency Fund
For most growing businesses, cash crunches are inevitable. For newer businesses, credit may not be an option, or it could be an expensive option. Now is the time to take your surplus earnings and commit them to an emergency fund you can tap to smooth out your cash flow when it’s needed. Even when you do have access to credit, financing unexpected events with your own cash can help to build your bottom line more quickly.
Pay Down Your Debt
If you do have debt, create a budget to pay it down ASAP. There’s no place for interest rates to go but up and carrying debt is never good for the long-term financial health of your business. If you need to access financing, use a line of credit through your bank. That could be the best solution if you need to meet short-term needs. With a line of credit, you only pay interest charges on the amount you borrow, and your payments replenish your credit line.
Build Your Business Credit
Most growing businesses need to access credit at some point. Although your personal credit history is an important consideration in granting credit to your business, lenders want to see how your business manages credit. The first place to start is with small lines of credit or credit cards issued by your vendors and suppliers. Suppliers such as Office Max and Home Depot tend to be more liberal in their issuance of credit cards. Your vendors, with whom you have done business for a while, might extend a small line of credit or a trade credit account.
Separate Your Financial Lives
Obtaining and managing credit will require that you keep your business records separate from your personal records. It will keep you on the right side of the IRS and simplify tax filing. It’s also advisable to organize your business as a separate entity, such as an LLC or S-Corporation.
Conduct a Wellness Check on Your Business
Your business’s vital signs are indicators of its financial health at any given time. It’s essential to check them regularly to get your business in tip-top shape and keep it there.
Cash flow: Review timing and method of payables and receivables to improve cash flow, examine cash flow trends, access to cash flow funding, funding future expenditures, projected cash flow.
Balance sheet: Review year-over-year changes to assets, liabilities, liquidity, inventory. Identify ways to improve your balance sheet. Set benchmarks for growth of net worth.
Expenses: Identify cost trends over the last year, examine variations, examine cost control procedures, explore methods for booking expenses for tax purposes, and set benchmarks for expenses.
Sales: Identify all revenue sources, examine trends and shifts in composition, examine the cost of sales and gross margin trends, review pricing against the competition and your profit margin, and set benchmarks for sales growth.
Strategic initiatives: Review past year’s initiatives for performance or effectiveness, measure against benchmarks, make necessary adjustments, and consider new initiatives.
Management: Examine the functions of management–how they are allocated and the use of time–assess how leadership is being offered and perceived and assess employee satisfaction.
Spend More Time Working on Your Business, Not in Your Business
For business owners, cash shortfalls, mispricing products, underestimating the competition, or any number of avoidable mistakes, are symptomatic of a much bigger mistake many make. That is, they spend too much time working in their business and not enough time working on their business. For businesses of any age or size, it can be the difference between being proactive and looking into the future versus living in a reactive world that never seems to go the way they want. It can also be the difference between success and failure.