You’ve survived the first year of your small enterprise. You foresee growth, but you want to be very careful. You understand that scary data: 20% of small businesses go bust in their first year.
You have a physical shop and back warehouse where you keep your inventory. Employees, suppliers, and customers have increased. You recognize that upgrades are now required from your accounting system and security system. This is part of any enterprise’s growing pains, whether it’s a significant oil and gas company or a cottage industry business, like weaved-basket makers or costume jewelry makers.
The plan to have an online presence was delayed but is now back on track and will be an essential factor to boost sales going into your second year. You’re talking to a service provider to create your e-commerce website. But you aren’t sure if this should be at the top of your priority list.
A friend who’s an accountant has been discussing with you the need to fix your financial system. You’re starting to believe that this might be the case. What else should you bear in mind?
Brief Background on the Failures
According to Georgia McIntyre of Fundera, the outlook for businesses in the healthcare and the social assistance sectors is looking great. The projected growth is 21%. These are the businesses with higher chances of survival beyond the fifth year.
Understanding Best Practices
Budgets, payroll, cost of goods sold, loans, taxes, credit card payments, statement of accounts from suppliers, and invoices for customers are the usual financial terms that any entrepreneur might have to deal with.
You need to bring this all together systematically. There are human and material resources involved. Your accountant friend is perhaps just giving you advice over a cup of coffee. Maybe you ask him to inspect your excel files from where you’ve been managing everything. But you need to build your finance department.
If you’re familiar with what a financial statement looks like, then you’re already in a good spot. You might need to at least tap the services of a bookkeeper if you don’t have one yet. Find someone you can trust.
Another financial management best practice that you should be familiar with is deciding whether to use the cash basis method or accrual method.
Always on the “tips list” is the need to separate business and personal expenses. Smash Digital notes that the habit of declaring personal expenses as part of the business expense can spell doom for your company. If you do this, then you’re just misrepresenting your actual financial performance. There’s also the risk of being caught by the IRS.
The list is long and includes items like planning your purchases, establishing SOPs, and taking care of the significant issues (e.g., legal fees or getting a loan). The few ideas here will help get you started.
Transitioning from Worksheets
Worksheets are excellent tools. But you need to get something that’s a little more robust. You need something that will not only balance your books but one that can also track inventory, cost of a product, payroll, and client invoicing, among others.
Some of the financial management programs in the market today are Sage, Tipalti, QuickBooks, Tide, and FreshBooks. Each has strengths and weaknesses. Find one that suits your needs. Tipalti, for example, has international payment facilities. QuickBooks includes a cloud service.
Perhaps you will not be as big as IBM or Microsoft with thousands of employees, but knowing these financial management practices and taking advantage of available tools will take your business beyond five years!