6 Ways to Maintain Healthy Business Finances

  • business-finances
Tudor Lodge

Most businesses fail due to financial issues. 42% of companies don’t make it to their fifth birthday. Even though the idea is profitable, many fail because of poor leadership. Lack of planning, poor financial decisions and poor sense of direction creep into such businesses. All these lead to financial problems and subsequently, complete business failure.

It doesn’t have to be this way.

The success of your business is directly linked to its financial health. To maintain healthy finances, you must adopt certain practices and make wise business decisions. It begins with you as an entrepreneur to nurture and cultivate the right models and values. So, how can you maintain healthy finances and subsequently realize success? Let’s look at six ways to do this.

Avoid Excessive Debt

Acquiring funds from lenders is a conventional way of capitalizing a business. However, excessive debt will limit the growth and profitability of your business. Not knowing where to stop with debt has put many businesses in a financially difficult position which they do not recover from most of the time. Some dangers of debt include the following:

No Flexibility: Excessive debt means you are unable to make timely monthly payments on your loans. This makes you liable to pay high-interest rates and late fees. With this record, you’re not flexible to grow your business because lenders and investors cannot look your way.

Bankruptcy: This is the worst possible danger to your business due to heavy indebtedness. It means the demise of your business. It gets worse if the business is linked to your personal finances-personal bankruptcy.

How to Avoid Too Much Debt

Fund Your Business Account - The first and most important rule for keeping clear of excessive debt is regularly setting money aside. Several business owners fund their business accounts with a fixed amount from their income at least once a month. Rather than borrow money, you can use that money for certain business expenses.

Use Appropriate Debt Financing - The popular debt financing methods are small business loans and business credit cards. Each of these tools has pros and cons. They can each work well for you depending on your business and requirements. Small business loans are generally more affordable and can paid in installment up to $2,500 per month, while business credit cards are perfect for certain expenses. If the card has a 0% APR for a year or longer, make your purchase early and pay without interest provided it's all paid off during that period. They also come with rewards like office supplies, Wi-Fi and others.

Don’t Move Too Fast - Some businesses borrow too much money in the beginning. This is the time to use as little as possible and grow slowly but surely. You can only spend more or borrow more if you have realized a decent return on investment.

Pay off Debt with Small Business Loans - Business owners should consider this option to avoid too much debt. It also ensures that your credit score does not plummet. In case you need a working capital loan in the future, you should have a stellar credit record. A single missed payment can ruin your credit.

Maintain a Low Working Capital - Working capital is important for the daily operations of a business-like salaries, overheads and minor purchases. The best way to improve working capital is to collect receivables as early as possible and delay the payables if possible. Many businesses experience the reverse instead and end up with insufficient cash.

How to Improve and Maintain Working Capital

  • Limit Transactions with Debtors
  • Don’t provide goods or services to customers who already owe you money or have a track record of non-payment. Take immediate action with debtors and provide incentives to paying customers.
  • Payment Monitoring
  • Train a collection team to handle debtors and reward those who collect.
  • Make Timely Payments
  • Automate your systems to make sure debt payments are made in time. Delays will attract penalties.
  • Manage Inventory
  • Avoid overstocking and ensure that finished products are sold off. Stop any products or services that are not selling.
  • Resolve Disagreements with Vendors and Customers on Time
  • If you leave disputes to linger, your company could be sued. If you end up in court, sort it out quickly to limit legal expenses.
  • Make the Most of Tax Incentives
  • They save you lots of money which can eventually be directed into the working capital
  • Recurring Invoicing
  • Recurring invoices not only streamline your payment process, but they also improve cash flow which keeps the business financially healthy. They automatically charge customers for a specific amount on a monthly basis.
  • Benefits of Recurring Invoicing
  • Steady Cash Flow

These factors ensure a steady cash flow each month to cover business expenses. Also, you can easily project your cash flow for the months ahead.

Quick Payment

Sending regular invoices motivates your clients to make regular payments. Since it is tied to a customer’s credit card, you are assured of prompt payment.

Save Valuable Time

Instead of wasting time chasing down customers for payment, this works automatically. Also it takes time to create invoices, let alone processing and tracking them. You could spend that time performing other important tasks.

Improves Customer Relations

You no longer have to engage in uncomfortable ‘where’s my check?’ conversations. Also, the customer perceives you as part of them and their budget.

Protect Your Company with Insurance

As a business owner, you are prone to risks the moment you start a business. A single lawsuit or unfortunate event can result in losing thousands of dollars or worse still shutting down your business. Insurance is non-negotiable. Some types of business insurance include:

Liability Insurance - This protects your business from claims of negligence that caused harm because of failure to perform or a mistake. Different industries have unique policies for this.

Property Insurance - Does your business own or lease its space? It doesn’t matter, you still need property insurance. It covers company equipment, inventory and furniture in case they are burnt in a fire, destroyed by a storm or stolen. Massive natural disasters like earthquakes are generally not covered.

Workman’s Compensation - As soon as you employ your first worker, this is a must-have. It covers disability, medical and death in case of injury or death of an employee while carrying out his duties.

Car Insurance - Your company vehicles must be comprehensively insured in case of an accident. You can never foresee what might happen. Car repairs cost a bomb and if there’s another car involved; the company will suffer damages for both.

Product Liability Insurance - Business owners that make their own products must acquire this insurance. No matter how safe you consider your products to be, one single product can cost your business lots of money in a lawsuit.

Get Better Pricing and Discounts from Your Vendors

Review your vendors once or twice a year. Ensure that your contract does not obligate you to renew automatically but allows you to decide. Get better pricing from your vendors by letting them know that you’re reviewing the contract and comparing their prices with their competitors. They don’t want to lose you as a customer. You’ll be amazed at how quickly you’ll get better prices from them. Take your staff through negotiation training on how to obtain massive discounts from vendors. Recognize and incentivize team members who pull this off. This strategy will bring down your business expenses by as much as 10% and save you thousands of dollars.

Have Regular Finance Meetings

Schedule a weekly finance meeting with relevant team members. Checking in on the finances regularly is a good practice and helps you assess how you’re doing. It keeps you organized and up-to-date. It’s easy to get so busy with other tasks that the finances can get out of hand. If you don’t know what’s happening with the finances, things can go wrong quickly. By the time you realize it, there’s a lot of damage that can barely be undone. When you’re up to speed, you can sort any issues out quickly and get back on track. 

No business owner wants their company to end up in a financial bind. It’s not only detrimental to the company but to you as an individual as well. Financial problems in the business can also cause the same in your personal life. We hope that these six steps can help you maintain healthy business finances for ultimate growth and success.

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