What are the Most Important Financial Aspects to Consider as a SME Owner?
Considering Financial Aspects is a sound evergreen in any business no matter the size and no matter how much they have grown.
Sometimes, these concepts are very clear in our minds but lose track of them along the way. On other occasions, we simply forget about these important pillars with catastrophic results.
Let’s refresh them together.
The Synergy between Budgeting and Financial Aspects
A budget is a financial plan were you define income and expenses. Definitely a valuable tool for small business owners, but let’s not limit it a just SMEs.
Its scope is to help you make informed decisions about your finances and ensure that you are on track to achieve your goals (both business and monetary).
When creating a budget for your small business, there are five important financial aspects that you need to consider:
1. Know your Income
This simply represents the money that you bring in from your business. It includes sales revenue but also all the other sources of income f.e. rent or licenses.
The main Idea is is to track your income or if you are at the early stages, try to have a forecast (nothing but an educated guess) of what your income will be.
This is in general the first step to understanding your finances and making informed decisions about your money. Of course you want to keep an official record of all the money that you bring in from your business. This is generally done through software or, if you are at the beginning, via Spreadsheets.
Trying to set realistic income goals is also a good practice. Generally, I tend to underestimate my income as this puts me in a better position. Also this gives me an extra buffer of money to copy with unexpected circumstances. This will help you stay on track and ensure that you are meeting your financial obligations.
Are you running a seasonal business? If yes, remember to consider trends and overall scarcity of cash. Most of our expenses are flat and spread throughout the year (f.e. rent of your premise) whilst others can be a one off lump sum (f.e. Domain Renewal of your website).
By tracking your income over time, you can identify trends in your business. This information can be helpful for making decisions about your pricing, marketing, and other aspects of your business.
2. Understand your Expenses
They represent all the costs that you incur in running your business. Rent, utility bills, salaries, marketing, and also general expenses for tools and equipment.
Same as above it is important to track your expenses. Just like with your income, you can use software of Excel Spreadsheets to record them. I have used the word “Understand” because I often suggest a simple exercise. Ask yourself where your money is going and identify which are is eventually costing you to much for the benefit that you get.
This also applies to some expenses that might be fixed. An example can be looking for a better electricity provider or upgrading to a new piece of equipment that is consuming too much energy. There are plenty of things you can do to “understand” your expenses which will get your business more profitable.
Categorize and set realistic expense goals. Once you know where your money is going, you can start working towards setting realistic expense goals for your business. Monitoring and analyzing will help you stay on track and ensure that you are not overspending.
3. Strive for a Positive Cash-Flow
Amongst all the Financial Aspects of a Small Business, Cash-Flow is one of my favourite. This concept was a bit vague at the beginning but it is clear for me now.
The ultimate target for a business is be sustainable and make profit. This happens when you have a positive cashflow.
The income generated by your business is greater than your expense hence, if we look at a specific financial period (it might be one Fiscal Year of One Fiscal Month, doesn’t matter) the difference of the two is positive, and you find more cash in your pocket then when you started.
Monitor your cash flow considering that it fluctuates during the year. Since Income and Expenses are not constant, cashflow will fluctuate and will be impacted by seasonal trends. Make sure to accumulate cash for the next expense in the pipeline as well as paying yourself.
Extending this exercise to a 6-12 months period to Identify cash flow problems can be a life saver in some occasions. Make sure to include an emergency pot that can be used when it required.
4. Mind Your Assets...
There are different definitions of assets but you can think of them as your main physical and not physical things that you own such as equipment, inventory, and real estate.
Whilst this is a general definition, I prefer using another wording for them: An asset is something that puts money in your pocket. Doesn’t It can be physical like the house that you rent out or non-physical like a patent or the people working in your business. Finally, it doesn’t have to be owned by you to bring you cash flow (f.e. you might lease an apartment to rent it out).
Leverage your assets to boost your business growth and don’t forget to insure them whenever it’s the case.
5. ...And Your Liabilities
Contrary to the Assets, there are debts that your business owes, such as loans, accounts payable, and taxes. As similar definition applies: they take money out of your pockets
Make sure to differentiate assets from liabilities as sometimes it gets a bit confusing. Practice will make it perfect.
If you know your income and your expenses it will be easier for you to pay your debts on time. This will help you avoid late fees and damage the image of your business. In case you are facing high-interest debt you might be able to same money by refinancing it.
A Summary with 7 Final Financial Advices for SMEs
A quick summary with valuable Financial Advices to support all the five Financial Aspects that a Small Business should look at:
1. Track Your Spending
Evergreen exercise for every business, bigger or small, from when you start out until the point when your exit opportunity. Recording the expenses can be used to objectively criticize your work, plan for your future and support your business proposition if you are planning to sell it.
2. Pay Yourself First
Prioritize yourself and focus on re-investing your profit in your business to create a momentum of sales/boost your brand visibility and awareness. Reward yourself both in a monetary way and with time off to think about the next move.
3. Have Clear Financial Goals
Work towards your financial goals and don’t forget to dust them off in case they don’t look clear anymore. Remind yourself why your are doing what you are doing, what is your exiting strategy (if there is one) and what is your next monetary goal you want to achieve.
4. Consult Experts and Financial Advisor
If you think you are missing something, seek out for advice. Also, make sure you are spending enough time with other business owners to exchange ideas being mentored whilst you grow.
5.Insure Your Business
You might want to insure your assets and eventually your own personal liability. Check Google for which insurance works best for you as well as for your co-workers and employees
6. Keep up-to-date on Tax Laws:
Whilst this might look daunting at first sight, knowing Tax regulation can save you and your business in many situations as well as saving you money. Read Blogposts and official bulletins and eventually seek out advice from professionals.
7. Invest in You and Your Business
Ultimately, your knowledge will be the fuel for your business. Get into the routine to read, and join seminars and events to expand your knowledge. Don’t be afraid of trying new things after evaluating their potential.
Considering all these points won’t be an easy task at least at the beginning. Many experienced business owners fail in one or more of these topics, and some of them won’t either consider anything at all. I discussed in other articles how you can leverage SEO, “Cheap Marketing” and the way you communicate with your business to sustain your growth
History tells us that resilient businesses approach this approach focusing on the Financial Aspects of their SME and they get more and more importance as they grow in size and revenue.
What do you consider important for your business? Is there any aspect that you consider more valuable than the other? Let me know in the comment below.
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