The idea behind running a business has always been profit maximization because entrepreneurs want to make money. Unfortunately, it doesn’t come that easy. When running a company, you have to look at different facets of the business. From curating a marketing plan to recruiting a talented workforce – you have to stay on top of everything. At the same time, you have to manage the financial resources efficiently to avoid setbacks.
You have to ensure the business has enough cash available to purchase inventory and incur day-to-day expenses. After all, cash flow problems can be pretty costly for companies. In addition, entrepreneurs have to calculate and file taxes accurately to close doors for IRS audits. Effective financial management helps companies stay solvent, ensuring long-term business stability.
You can analyze the metrics to determine the return assets brought into the organization. It would give an insight into the company’s performance, allowing you to improve financial management. However, if you don’t know much about the finance world, have a look below.
Here are six tips for managing a company’s financial resources effectively.
1. Monitor Financial Position
Before implementing practices to improve financial performance, monitor how the company is doing currently. You can take a look at its balance sheet to determine asset and liability allocation. Similarly, you have to ensure liabilities aren’t exceeding the assets or equity. Otherwise, the company can be in crisis. But unfortunately, not everyone can comprehend financials because it requires expertise and financial know-how. So, why not learn the ropes?
As education has become accessible with eLearning programs, explore higher degree programs. If you have a bachelor’s degree in business, opt for MBA finance online to navigate the financial world. It will equip you with the skills and expertise needed to analyze financials. From income statements to cash flow – you will learn to find trends and patterns that impact business performance. In turn, you can work on the trouble areas, increase revenue, and maximize profits.
2. Manage Cash Flows Smartly
At times, businesses generate hefty revenues and profits, yet they don’t have cash available. That usually happens because business owners make excessive credit sales. Clients make purchases but on credit, not bringing any money into the business. Such practices can land a business into a liquidity crisis in no time. Therefore, you have to manage cash flow smartly. First, put a limit on monthly credit sales. You can set a 40/60 ratio between credit and cash sales to increase cash inflows.
Second, introduce smart payment terms to make debtors pay timely. Perhaps, you can offer a cash discount of 2% if a client pays within 30 days of purchase. Lastly, ensure you don’t have a lot of inventory piled in the warehouse. It might spark positively in the financials, showing a high amount of current assets. Still, it creates cash flow problems in reality. You have to ensure all assets are liquid so that you can convert them into cash quickly.
3. Practice Efficient Stock Control
It is wise to stay one step ahead of customer demand, but that doesn’t mean you should keep accumulating stock. It exhausts resources and increases the per-unit cost of the product, lowering profits. Therefore, inventory control is essential to optimize the merchandising process. You have to invest in an intelligent inventory management system to track and organize stock. It would also allow you to control and locate the in-stock items, streaming workflows.
Moreover, the inventory control system will unfold details of how much stock is available. It informs the authorities when inventory is running out, allowing you to restock immediately. In short, having an inventory control system will help with optimizing inventory loss, prevent losses, and avoid problems of overstocking. You won’t have cash tied up in inventory, decreasing the likelihood of liquidity problems.
4. Stay on Top of Business Taxes
Although paying taxes is every entrepreneur’s least favorite task, don’t find ways to avoid them. Shady practices might save a few bucks initially but would put your business in legal trouble, costing much more. Hence, register your company and stay on top of the taxes. As a sole proprietor, you only have to account for income tax. However, if you run a company, you have to pay corporate tax, deducting it from profits.
Lately, the corporate tax rate is 21% in the United States of America. It means you have to deduct 21% from the net profit. It might seem a lot, but it will significantly reduce the taxable income once you include deductibles. You have to subtract all deductibles in the income statement under the expenses columns. Hence, make sure you have evidence that the particular item is tax-deductible. Lastly, keep up with the tax filing dates to avoid late penalties.
5. Analyze Financial Metrics
Once you have gone through financial statements, look deeper. You have to analyze the financial metrics and implement strategies to ensure effective financial management. As a business owner, you can begin by taking a look at the profitability ratios. You have to identify the components that halt profits. The cost of production is often low, leading to a gross profit margin, but high expenses keep decreasing earnings.
Moreover, you have to analyze the debt and equity ratios. Understand the firm’s dependence on debt and ensure it doesn’t affect the credit score. You can also check the efficiency ratios to decipher asset performance. It is essential to know that assets generate profitable returns; otherwise, you might restructure the financial model.
6. Keep Financing the Business
At some point in time, every business needs additional funding. Although people are afraid of external financing, it is essential to keep growing and expanding the business. Hence, look out for loans or open a credit line to acquire funds. You can also opt for equipment financing if your company is purchasing a fixed asset. However, make sure the interest rates are low enough for the business to make timely repayments on loan.
Suppose your company isn’t in the position to take debt, explore crowdfunding forums. You can even reach out to angel investors or venture capitalists to raise funds. These are wealthy individuals who fund businesses in exchange for a share of ownership. Thus, determine which funding option fits your business needs the best and use the resources efficiently.
Effective financial management is vital for the success of every business. Entrepreneurs have to utilize finances smartly to push the company in the right direction. In simple words, entrepreneurs have to allocate a budget, manage cash flows, and monitor financial performance. Likewise, you have to account for taxes to avoid wasting financial resources on legal matters. A robust financial infrastructure will make the company thrive while maximizing profits.