A large majority of businesses fail within the first 18 months. A crucial part of keeping your small business alive is managing your finances well. Here are 4 tips for doing this effectively.
Practice basic accounting from day 1
This is arguably the most important thing you can do as a small business owner. It doesn’t have to be complicated, either. The goal is to track whatever money you’re spending and receiving. Small business owners often overlook the importance of this aspect of the business, thinking they’ll deal with it when they are larger. This tends to lead to issues such as missing receipts and invoices. Start tracking your money from day 1, and it’ll make your life easier in the long run.
Stay lean – invest instead of spend
Unnecessary expenses that seem insignificant can add up over time. Don’t spend on things you don’t need to. This also includes not hiring staff until you absolutely require the manpower. As a rule of thumb, cut costs as much as possible during the early stages. Businesses have two types of costs – fixed and variable. Fixed costs, such as software and office space, should be reduced to a minimum. Try to lease a co-working space to begin with and hold meetings on Skype. You can even try to reduce administrative overheads by bartering for services. The last rule in staying lean is all about return on investment. If you see a logical path between the purchase and an increase in revenue, then the money is probably worth spending.
Separate personal from business expenses
As small business owners, it’s sometimes hard to separate the business from personal. The business becomes a part of who you are. But that shouldn’t apply to finances. The two should be kept separate. Don’t use your personal cash on business expenses, and don’t use business for your personal needs. Having separate bank accounts is a great way to make sure the two stay separate.
Learn the art of pricing
Saving on costs is great, but as a business your goal is to generate revenue and profits. A critical part of that is to figure out exactly how much to price your products or services. Pricing is as much of an art as it is a science, and is something most first time entrepreneurs cannot figure out. Sadly, most business owners simply take an arbitrary “industry” number and use that as their price point. This often results in undercharging, affecting the already low profit margin of a small business.
The key here is to determine not just the price but, more importantly, the value of your product or service. By understanding the true problem you’re solving for your customer (and how it affects their life), you’ll be able to price your products or services much more effectively.
The primary objective of any business is to make profit by providing something of value to the customer. Settling your finances from the get-go is imperative.