Measuring the health of your finances is a crucial part of running a small business. Poor financial health can break an otherwise great business. It doesn’t matter how great your idea is—if the numbers don’t add up, it could prove impossible to get things back on track.
If you’re a current or aspiring small business owner, here are six ways to help you keep your financial health in order. We’ve also added some key financial terms that you may need to learn along the way:
- Solvency ratio
- Business insurance
- Break-even analysis
- Profitability ratio
- Business liability
- Working capital
1. Keep an eye on your budgets
Many small businesses have a limited amount of money at the ready, especially when they’re first starting out. Budgeting can help you make the most of what you do have. Planning out your spending helps give you clarity on how much you actually have to spend in different areas of your business.
Recommended reading: 7 smart ways to finance your business
But a budget is worthless if you don’t stick to it! Keeping a close watch on your incoming and outgoing cash is essential. Otherwise, you might find yourself in dire straits before your business has a chance to get off the ground!
Key term to know:
- Solvency ratio – A solvency ratio indicates how able your business is to pay its debts from sources other than cash flow. Careful budgets can help you stay on track during leaner times for your business.
2. Don’t take shortcuts
Working smarter can help boost profits and efficiency. This is a key driver of growth for many small businesses. However, you still need to deliver quality work to create long-term success. You’ll need to strike a balance between speeding up your processes and cutting corners.
Shortcuts often lead to mistakes, accidents, and low-quality work. These can be costly for any small business. While they might save you time and money in the beginning, you’ll probably lose those ‘savings’ trying to fix avoidable problems and keep customers happy. In a worst-case scenario, a shortcut could lead to an expensive insurance claim or lawsuit.
Key term to know:
- Business insurance – Different types of business insurance can help create a safety net should something go wrong, such as a mistake in your work, accidentally damaging a customer’s property, or wild weather destroying parts of your building or stock.
3. Prioritise record keeping
Recording your revenue and expenses is crucial. Accurate data will allow you to compare historical trends and help you understand patterns within your business. For example, you may find that your small business makes more sales in spring and summer than in autumn and winter. Knowing this, you can better plan your marketing and promotions for the next year.
Consistency is key when it comes to bookkeeping and accounting. Setting aside time each day or a few times a week could help you stay on top of your books and keep the job from getting too overwhelming. You might also consider hiring a bookkeeper to take on this task.
Key terms to know:
- Break-even analysis – A break-even analysis determines when your small business will be profitable. It can help you understand the number of products or services you must sell to cover the costs of running your business. Accurate record-keeping helps you stay on track and know when you’ve reached this goal.
- Profitability ratio – A profitability ratio is a calculation that shows how successful your business is. They measure your business performance or how profitable you are.
4. Keep up with your receivables
Believe it or not, some business owners are so focused on providing excellent customer service that they sometimes forget to get paid! Collecting payment for the work you’ve done is obviously essential to growing a successful small business. But it’s often easy to miss an invoice or two with so much else on your plate.
Quickly collecting payment is important to ensure your cash flow. Invoice software could help you stay on top of late payments from customers and help automate collection.
Key term to know:
- Business liability – Your business liability is how much you owe to others, such as a small business loan. Keeping up with what you’re owed could help your keep up with payments and out of debt.
5. Manage your expenses
Stretching every dollar is essential for many small businesses. Keeping track of your expenses could help you identify unnecessary spending so that your money can be used properly. Quick savings might be found in unused subscriptions and apps that you signed up for and forgot you had.
Recommended reading: How to manage finance as a tradie
Another way to reduce business expenses is to keep an accurate inventory. Unnecessary ordering could cost you more than just the price of the part. There may also be shipping or delivery costs, plus a rush fulfilment fee if something is needed right away. Knowing what you already have on hand could help you avoid wasting money and time waiting for something you don’t really need!
Key term to know:
- Working capital – Your working capital is the difference between your business’ current assets (such as cash, raw materials and stock) and your current liabilities (such as debts and bills to be paid). Managing your expenses is an important part of creating more working capital for your business.
6. Ask for help if you need it
Like many small business owners, you likely take on several roles to keep things running smoothly. However, that doesn’t mean you’re an expert at everything. Financial matters are often tricky for both new and established business owners alike!
You might consider hiring someone to handle the financial management of your small business. A bookkeeper or accountant may be able to lend their expertise to updating your books, budgeting, filing business taxes, and choosing your business insurance. This, in turn, frees up your time to focus on areas of the business that might need more attention.
7. Keeping your financial well-being in check
Turning your business dreams into reality greatly depends on your financial health. It’s important to learn how to budget, plan and review your expenses and incoming revenue regularly. The steps above, along with others, could help you create a small business that’s financially secure and able to grow year after year.
Quick Small Business Financial Health Checklist
- Make a budget and stick to it. Review your budget regularly to ensure you’re on track.
- Maintain a high quality of work, even while looking for ways to improve efficiency.
- Keep your books updated and accurate.
- Chase unpaid invoices as soon as possible. Invoicing apps could help you manage this task.
- Reduce business expenses by eliminating unnecessary purchases and tracking inventory.
8. Protecting your small business
Business insurance is another tool for securing your financial health. Policies, such as Public Liability and Professional Indemnity, help small businesses prepare for accidents and other unexpected events that can cripple their finances. Instead of shouldering the cost of claims and lawsuits alone, your business insurance will help you cover these expenses.
BizCover makes buying business insurance easy. In just minutes, you can compare quotes and buy cover—no paperwork necessary. You might even be able to switch and save! Get your free quotes today.
This information is general only and does not take into account your objectives, financial situation or needs. It should not be relied upon as advice. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording.
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ABN 68 127 707 975; AFSL 501769
