Last editedJan 20212 min read
Running a small business requires an eye for detail. You need to be able to perceive exactly what customers want and expect from your brand. You need a strong understanding of the market you occupy and your place within it. You need a detailed and comprehensive strategy that is always adapting to the changing needs of your market and customers. But perhaps most importantly of all, you need to manage your finances in a way that is fiscally precise and aligned with your operational goals.
Money can become intoxicating when you’re running your own business. When you start making it consistently, it’s all too easy to take it for granted. But lose respect for it, and you’ll quickly find that you don’t have any. This can create a slippery slope, where disaster lurks waiting at the bottom. Check out our essential tips for managing your small business finances successfully.
First and foremost, charge what you’re worth!
If you’re new to running a small business, and the intricacies of small business finance, you may try and create a name for yourself by undercutting your competitors on your prices. Promotional offerings are a great way to make a first impression, but being the cheapest game in town can create lasting problems for your finances.
Low prices mean a low turnover while you’re establishing your presence in the market. This, in turn, can lead to razor-thin profit margins and dubious cash flow. If you already operate in a traditionally low-margin sector like hospitality, it only takes a handful of unexpected expenditures to spell doom for your business.
Be proactive in maintaining cash flow
Cash flow is one of the most important elements of your small business finances. And while you can never exert complete control over your cash flow, that doesn’t mean it should be left to the whims of chance.
Know where spending is prudent and where it’s wasteful
Managing your small business finances doesn't mean becoming a miserly spendthrift. The right capital investments are essential to lay the foundations for future growth, improving productivity and delivering operational excellence. But some areas of spending have a higher ROI than others.
For instance, a new piece of equipment or software platform may improve productivity, reduce personnel costs and make a good impression on customers, resulting in a growing ROI over time. Whereas your energy spending is unlikely to impact your operational prowess – you’re effectively burning money if you don’t shop around for a new business energy contract when the current one expires.
How to calculate ROI
There’s an easy formula for calculating the potential ROI of your capital expenditure. Subtract the initial value of the investment (what you pay for it) from the final value of the investment (how much you expect to make from it). This gives you a figure for the net return.
You can then divide this by the cost of the investment, and multiply it by 100 to express it as a percentage.
Grow slowly and sustainably
You don’t want your small business to stay small. And that’s fine! But in your zeal to expand and prosper, be wary of growing too much, too quickly. You need to have an infrastructure of personnel, equipment and processes to accommodate the increased turnover and workloads that come with growth. Otherwise, the quality of your customer service will invariably suffer and your business may experience a crippling implosion.
In a sea of metrics, don’t lose sight of your margin
Finally, regular reporting is essential in managing your small business finances. But it’s important to know where to look to gauge the financial health of your business. Turnover may be a reassuringly robust metric to track. But a high bottom line can render it meaningless. Don’t lose sight of the most important metric of all, your profit margin.
We can help
If you’re interested in finding out more about any aspect of your small business finances, then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.