Managing Your Small Business Finances

Small Business Finances: What you need to know when you’re starting your small business

Effective management of a small business’ finances can make all the difference between success and failure. If you’re starting or thinking about starting a small business but have no idea on the best way to manage your money, we are here to help!

In this post, our resident money coach, small business accountant and financial advisor Kate Bradley will explore the basics of small business finances to help you get a handle on this important aspect of business management.

Why managing your money matters for small business owners

A considerable number of small businesses in Australia fail in the first few years of operation.  While it’s impossible to know the exact cause of each and every failure, it’s safe to assume that the poor management and understanding of their financial situations played a large role in their downfall.

The mathematics here is pretty simple; If you don’t manage your small businesses cash flow effectively, there won’t be enough of it to keep you afloat in the medium to long term. 

 “Failure to plan is planning to fail”

Benjamin Franklin

You’ve all heard this quote. It is applicable across most parts of business, and your business financials are one of them. If you don’t set goals and budgets, you are setting your business up to fail as you won’t know if your business is making money, if you can afford to bid on that new contract, or if your staff are being utilised in the most efficient ways. 

Bookkeeping - The secret to success

Most small business owners are unlikely to profess their love for bookkeeping. However, it’s important to understand that maintaining comprehensive and up to date financial records can actually make running your business easier. When your financial records are up to date, you have direct access to accurate financial data about your business. Understanding and using this information helps you make financial decisions that impact the business quickly and efficiently. 

Accurate and up to date bookkeeping will also mean your accountant will also hassle you less come BAS and tax time, as all the information that they need is readily available. This means you can use the time with your accountant to plan out the next few months for your business and really hit those financial goals. 

5 key topics when learning about small business finance

 1. Revenue and Expenses

 Every bit of money that comes in and money that goes out should be recorded. Most of the time the easiest way to do this is by utilising a small business accounting system. Most small business accounting software is cloud-based, which is fantastic in that you can invite your staff and your advisors (accountants and bookkeepers) into the accounting system and you can all work off the same set of numbers. Gone are the days of sending spreadsheets and backups of your desktop accounting software to your accountant so they can do your tax return. Now they just need an internet connection and they can access your current data anywhere. As long as your information is kept up to date, your advisors should be able to produce timely and accurate reports to help you with your business decisions. 

2. Cash Flow

Cash flow is the most important aspect of small business finances. If you don’t have enough cash available, then you can’t pay your employees and suppliers, and you will not be able to continue running your business for any considerable length of time. 

Effectively managing your cash flow is one of the cornerstones of running a successful small business. 

Small business owners must ensure they have consistent cash flow coming in. Common examples that can really help with your cash flow include:

• Keeping on top of any money that your customers owe you
• Being proactive about recovering money from payments
• Taking non-refundable deposits
• Requesting payment upfront

• Scheduling your bills to be paid in line with when your cash comes in 
• Utilising business to business strategies like paying for inventory and supplies on account 

Effectively budgeting and saving for large upcoming expenses (for example, quarterly Business Activity Statement or quarterly employee superannuation) can also allow you to stay on top of your cash flow. By properly forecasting and planning for your businesses expenses you can ensure that your bank accounts aren’t running on empty at different times during the month. 

3. Inventory Management

Inventory management is key when running any kind of product-based business. Small business owners need to be careful not to over-capitalise their inventory (ordering too much stock and holding it for extended periods of time) as this uses up your cash on items that may not be required. 

Utilising an inventory management and ordering system makes managing your inventory much easier than a manual system. Through these systems, you can implement stock alerts and automate the reordering of stock so that you never run out, and never hold too much. 

A good inventory management system also allows you to track sales and or usage trends easily, avoid theft and wastage, and ensure that you are stocking what your customers want. 

4. Accounts Receivable and Accounts Payable

Accounts receivable: Money that is owed to you from your customers. 

Accounts payable: Money that you owe to your suppliers and creditors. 

Manually keeping track of your small businesses accounts receivable and accounts payable can become complicated and time-consuming. Customers will often “forget” to pay if they are not being followed up for their payments, and you will inevitably miss a payment to a supplier if you don’t keep track of due dates and what’s owed to who. 

Having your invoices entered quickly and efficiently into your accounting software allows you to set up automated invoice reminders and online payment options so that your customers will pay you quickly. 

Entering everything into your accounting system can become tedious, however, most small business accounting software now has the functionality of being able to auto-send your invoices to the accounting software, and the software will utilise artificial intelligence to pick up the pertinent details in the invoice and enter it for you. 

Automation like this saves a lot of time and means that the opportunity to miss bills being entered into the system is greatly reduced. You will also be able to track your upcoming cash outflows easily and plan to align them with when your customers are likely to pay you. 

5. Employees and Payroll

Note: All small businesses in Australia are required to utilise Single Touch Payroll (STP) enabled payroll software and submit their payroll records each pay cycle to the Australian Taxation Office (ATO). This initiative was implemented by the Australian Government to provide greater transparency over what Australians are being paid and to ensure compliance with superannuation laws. Small and micro businesses in Australia must ensure that they comply with these regulations and lodge their payroll activity in a timely manner so that they do not get penalised by the ATO. 

Payroll is something that small businesses cannot afford to get wrong. Paying your employees correctly and on time is so important in maintaining good relations and ensuring your business is operating within the law. 

Small business owners must ensure that: 

• All employees are being paid at least the minimum wage and entitlements based on their specific award (subject to change as often as every 6 months) 
• All employees are receiving pay slips 
• The employer is withholding the correct amount of tax from employee wages.

All of the above have the ability to be automated with the correct systems. Having these systems correctly set up from the start can save a lot of time and hassle in the long run.

Help is available to get your small business finances set up

 Accountants, bookkeepers and business coaches are all excellent resources to help you get your systems set up correctly and your small business finances on track for success. Once the systems are set up and you understand how to use them, they can streamline your processing providing you with more time to focus on growing your business and working on your business goals. 

Kate can help you get your small business financial management systems set up and working towards your success. Contact her today!

Kate Bradley - Money Coach

Kate Bradley has over 10 years of experience as a small business accountant and financial advisor. Kate brings her significant experience advising on the financial aspects of small business to the BMH team, with a particular focus on the optimisation of systems, budgeting, profitability and cash flow management.

Kate is extremely passionate about financial literacy on both a business and personal level and strives to empower individuals to take hold of their own financial freedom through education and development. Connect on LinkedIn.