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5 Critical Things Entrepreneurs Need to Know about Managing Their Company's Finances.

Managing small business finances

In early stage companies (and even some later stage or mature ones), there is no one area where most entrepreneurs and small business owners are lacking in just the basic fundamentals, than in managing their company's finances.

It's more than just managing cash flow

Although, as most of you know, I believe it is one of THE critical aspects of managing and growing a business. Managing small business finances is understanding what your numbers mean and how to best manage them.

Why is it important to manage small business finances?

Starting and operating a small business is replete with challenges, but nowhere are the challenges greater than for an entrepreneur to know how to handle their company's precious financial resources.

And this is especially true if the entrepreneur is not a financial person by training. In the earliest going you, invariably, can't afford even the most fundamental outside expertise, but you still have to manage what's coming in and what's going out of the business (hopefully, more of the former, less of the latter).

Later on, when you do have someone performing this function, YOU still have to understand, at all times, where you are financially. Your company's ability to survive, grow and, if necessary, raise capital, will depend on it.

So here are the five most critical things you should know most about and use to manage small business finances:

  1. Learn to understand basic accounting and formalize it sooner rather than later.

    You don't have to become a CPA or take a boatload of accounting courses, but, at least, learn to understand what's in a basic income statement and balance sheet and what they mean. Whether you have some familiarity, or you're an absolute novice, books like "Accounting for Dummies" or "Accounting Made Simple" can give you all you need to know.

    Don't keep your books on scraps of paper, just your checkbook, or on some Excel spreadsheets. Go spring for some basic accounting software, early. Maybe start with something like Quickbooks Online or Freshbooks or a simple desktop product like Simple Accounting that won't set you back a lot of money to start with, can grow as you grow and have all the basics you need to manage your business including the ability to set and track a budget.

  2. Follow the "gospel of cash flow" and it starts with revenue generation.

    A while back, I wrote a two-part blog - (To the Entrepreneur, Cash is Almost As Important As Breathing (But Only a Close Second) - Part I and Part II) that kind of evangelized this "gospel."

    The most important part of cash flow is cash generation.  If you don't generate it, you have nothing to manage.  So, the biggest focus, early on, is driving revenue...and then collecting on that income, the earlier, the better.

    Wherever possible, get deposits, up front.  They help defray purchasing of parts if you're in a manufacturing business or pay critical salaries and contractors if you're in the services business.

    Offer discounts for early payment.  Do the same thing on your payment end.  Seek discounts and drag out payments to the limit.  If it's net 30, don't pay in 25, pay in 30.

  3. Critical numbers: the simpler the dashboard, the easier to drive the business.

    Determine what the key metrics or "dashboard" are for your company, that is, those numbers that you can look at and know that, either everything is hunky-dory, or there's trouble on the horizon.

    Key metrics are more than just revenue or expense. I always had three or four, depending on the type of business I was running. If it was a manufacturing business, the cost of goods sold (COGS) were critical. If it was a distribution business, shipping costs were essential.

    In every business, no matter the type, I tracked forecasted net cash (the difference between 8-week forecasted cash in and cash out), next 30 days' sales forecast and backlog (to be billed/shipped over next 60 days). What are yours?

  4. Costs are interrelated, either impacting other costs or revenue.

    Before you make a cost spending (or in desperate times, a cost cutting) decision, know the effects of those costs.

    For example, would you understand that spending a $1000 on two new laptop computers could make your two $75,000 developers way more efficient or would you spend it on a new conference table that would impress customers?

    If you had to cut expenses, would you understand that cutting the $50,000 marketing person, who helps generate leads, would then make the sales guy, who's responsible for $1 million in sales less efficient (potentially lowering revenue)?

  5. Before you take somebody else's capital, show you can manage your own.

    I always find it most interesting that few companies when trying to raise money don't emphasize how well they have managed to stay in business for as long as they have by bootstrapping, conserving cash and practicing frugality.

    Small business owners never give themselves enough credit in this area. They should be proud that they have "survived" for as long as they have. And, in turn, they should show how they will continue to manage their prospective investor's capital the same they have their own.

Your small business' future is dependent on how well you can deploy, manage and leverage your precious financial resources.  Hopefully, these five critical things can guide you.

"The Entrepreneur's Yoda" knows these things. He's been there. May success be with you!

Are there things you have found useful to manage small business finances?  Please share your thoughts in your comments.  It can help another entrepreneur.

If you like this post, by all means, share it with your networks and colleagues.

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