According to the US Bureau of Labor Statistics, 20% of all businesses fail within the first two years of inception and by the fifth year, that number rises to more than 75%. The main causes of business failure include financial illiteracy and cash flow issues. With that in mind, here are five tips for small business owners.
Don’t Let Bad Credit Hold You Back
Granted, most traditional lenders classify borrowers with a FICO score of 300 to 629 as “high risk.” This means that, if your FICO score falls within this range, you are unlikely to get a loan from a traditional lender. However, that does not necessarily mean that you cannot secure funding for your business. In other words, you can obtain the business financing you need from other sources including your family and friends, community bankers, Internet lenders and crowdfunding platforms. Additionally, you can also attract angel investors, obtain a Small Business Administration (SBA) loan, use your credit card, pledge a percentage of your future earnings, apply for a merchant cash advance, or sell your receivables at a discount (factoring).
Consider a Financial Accountability Partner
Accountability is a core component of any business venture. For this reason, you should consider having a financial accountability mentor, preferably someone who knows more about finance and business in general than you do. This is important due to several reasons. Firstly, such a person will likely to offer you sound financial advice and improve your financial knowledge. Financial literacy is important in business because it covers everything from budgets to financial statements to taxes. Without sound financial knowledge, you will not be able to monitor how money flows in and out of your business, meaning your business is likely to fail. It is worth noting that about 40% of small business owners in America are financially illiterate, according to a 2014 study published by Intuit. What’s more, data from the US Bureau of Labor Statistics shows that about 75% of small businesses fail within the first year. Secondly, your financial accountability partner would help you expand your viewpoint, helping you develop innovative solutions to common business problems. Thirdly, your financial accountability partner would introduce you to his/her network of associates and contacts, allowing you to build strong and productive business relationships with other entrepreneurs and businesses.
Have an Emergency Fund for Your Off Season
A recent banking survey revealed that more than 80% of all businesses fail due to cash flow issues. For this reason, you should have an emergency fund for your small business. Also known as retained earnings, an emergency fund is basically an amount of money set aside to allow your business to continue running normally after an emergency or during lean times. Additionally, you can use the emergency fund to capitalize on opportunities, such as buy out a competitor.
Automate Your Bill Payment
Automating your bill payment (accounts payable) process will benefit your business in the following ways:
• Record keeping — Compared to paper records, digital records are generally less bulky, easier to organize, store and retrieve than paper records. This means that automating your accounts payable process will improve your filing system, lower your operational costs, protect your records, and save space and time.
• Improve accuracy — When processing paper involves manually, errors such as invoice duplicates, entry errors and lost data are likely to occur, increasing your operational costs. By automating your bill payment process, you would be able to eliminate virtually all these errors, lowering your cost of processing invoices. What’s more, automation would eliminate most of the manual tasks, thereby improving speed and efficiency. For instance, it would allow you to use technologies batch scanning, accounting software integration and web-based requisition forms to capture data quickly.
• Streamline invoice approval — Processing invoices is usually a time-consuming task. Thankfully, by automating your bill payment system, you can remove most of the manual work from the process, making the process faster and more transparent. For instance, a document management system would be able to handle most of the manual tasks in this process including matching, approval routing and distribution of invoices and purchase orders, allowing your employees to handle high-value tasks.
Stay on Top of Taxes
As an entrepreneur, you have to stay on top of your taxes because you will need to prepare your financial records and statements. Some of things you can do to achieve this goal include participating in a tax deferrable retirement program such as 401(k), using accounting software, taking full advantage of your allowable deductions and ensuring your business records are accurate and up-to-date.
If you follow these five tips you’ll be in great shape for managing your business finances.