Do you know how to keep up with your business finances as a business owner? If you are a business owner who is stretched out among responsibilities while not knowing about business finance, read our insights and tips from this week’s Instagram Live at 5.
What prevents business owners from paying attention to business finance?
Misperceptions around financial responsibilities:
Some business owners might believe that increasing revenues are going to solve all their financial problems. Even though boosting sales will increase your profits, it might not always be the key to solving the financial challenges of the business as the issues might be around the cost structure.
Relying on finance and accounting professionals:
Relying on a bookkeeper or accountant might be the go-to strategy for many business owners in handling all accounting and finances. Although these professionals are experts in their field, business owners should still be on top of their finances to understand their business better and to prevent any potential issues from rising.
How can business owners take steps to understand their business finance?
Go over your financial documents and bookkeeping consistently:
There might be a large pile of documents business owners might need to go through to be on top of their finances which might be overwhelming. Business owners might be tempted to push these responsibilities further to avoid financial stress, however this leads to a bigger load of documents to face afterwards which might only be more stressful. Going over bookkeeping and financial documents on a monthly basis can boost the understanding of business owners and lower their financial stress in the long run. To make this task more entertaining, our recommendation is to pair your financial tasks with a fun activity after completing them to get yourself excited about the day.
What are some business finance tips business owners should know?
Focus on profit instead of revenue:
Some business owners might focus more on their pricing strategy and promotions than understanding their cost structure. Profits are a business’ net gains after deducting costs from revenues, which is more essential in understanding the success of a business compared to revenues alone. Businesses might often focus on raising their prices, however understanding your cost structure and coming up with ways to reduce your costs is as essential for increasing profits.
Work towards getting a steady paycheck:
Do you forget about paying yourself a steady check while managing your business? Some business owners focus too much on how they are reinvesting their money to their business and forget about paying themselves a salary, which might hurt their credit score and prevent them from buying future assets such as cars, houses and more. If you want to have a steady paycheck that will both provide you financial stability and leverage your credit score, pay your salary before deciding on other financial decisions.
File your taxes properly:
Claiming less revenues than the actual amount to lower income tax paid is a common practice among some business owners. However, this practice might prevent funding opportunities for these businesses as they might become ineligible for funds and credit programs. For example, some businesses that didn’t claim their income properly in 2020 may have lost some COVID funding opportunities by not having sufficient income levels.
Protect yourself from financial risk:
Focusing all efforts on growing a business might cause neglect in preparing for unexpected financial risks. However, as COVID has shown many businesses, it’s very important to be financially prepared for unexpected risks to keep a business afloat during losses and ambiguity. In order to create a financial cushion for risks, business owners should understand their monthly cash outflow by checking their bank account and credit card statements and understand their bills, debt payments, and more. Our recommendation would be to have a safety net of at least 6 months’ worth of cash outflow to protect yourself from financial risk.
Separate your personal and business bank accounts:
Personal and business expenses might get more complicated when business owners don’t keep separate accounts for their personal and business income and expenses. Having different bank accounts and credit cards can prevent confusion around bookkeeping and help business owners understand their financial situation easier.
Build your credit score for future opportunities:
Borrowing credit is one of the ways to get funding and grow a business, which may require a high credit score. To build a credit score for future opportunities, businesses can start small from the launch of the business. Getting a low-limit credit card, claiming all income despite possible income tax and working with an accountant are some of the practices we recommend.
Seek options for credit:
In addition to having a good credit score, businesses need to have their financial documents ready to apply for credit. Having a monthly profit forecast can reveal how much a business might need to borrow in order to grow and can drive funding strategy. For start-ups and businesses in higher-risk industries, the Business Development Bank of Canada might be one funding resource to get business credit. In addition, even if your business might not qualify to get credit from other banks, talking to them is highly beneficial as it might provide more information on future options. For example, the Bank of Canada has some resources for business owners that can help build their business regardless of their eligibility for credit, including financial templates and courses.
Work with an accountant:
Although relying entirely on an accountant may prevent you from being on top of your finances, getting help from a professional is a great way to get your finances and accounting in order. Business owners might get financial insights from accounting and finance professionals about where their weaknesses and opportunities might be, how they compare to the industry and competitors and more.
We hope you enjoyed reading our blog about business finance! Check the full live chat here. You can find our live chats and more of the latest financial news on our News Blog. Stay tuned to learn more tips on a new topic each week on our Instagram Live at 5 on Instagram! Aside from our live chats, we post daily financial updates on social media! Follow us on Linkedin, Twitter and Facebook and Instagram.