Financial Knowledge Can Lead To Small Business Success

by Debbie McGrew, Debt.org

Starting a small business often means taking a lot of risks, especially financially. Without a proper financial foundation, those risks may not pay off. Economic success is never guaranteed, but when you’re equipped with a strong understanding of finances, there is a better chance for your business to succeed.

Financial knowledge lends for better understanding of financial documents, statements and reports, which can help to determine the financial health of your business and when to make changes regarding payroll and other expenses when cash flow isn’t where it needs to be.

Make a Plan.

The best way to ensure financial success for your small business is to make a plan and follow through with it. Think about reading about solutions for financial management and review other successful business plans as an example for your own.

When writing a business plan, make sure to include pro forma statements, as investors may not consider plans without them.

A pro forma statement is a method of calculating financial results of a business over a three- to five-year period that projects revenue and estimates future expenses and profit.

Here is how to prepare a pro forma statement for your business:

– Calculate Revenue Projections. By researching average annual revenue in the industry, make educated estimations of future cash flows, asset accumulations (including equipment and fixtures), liabilities (such as loans and lines of credit) and other costs, including rent, payroll, insurance, permits, inventory and operating expenses.

– Prepare a Balance Sheet. Include liabilities, current and fixed assets, and shareholders’ equity.

– Prepare an Income Statement Sheet. Include all that is applicable, including sales revenues, taxes, cost of sold goods, any losses, operating expenses and depreciation of property.

– Prepare a Cash Flow Statement Sheet. Include all that is applicable, including net income, non-current assets and any stock issues dividend payouts and repayments of bonds.

– Prepare Pro Forma Financial Statements. Create monthly statements for Year One, quarterly statements for Year Two and annual statements for Year Three.

Making Payroll.

It is common for most small businesses to experience a cash flow problem. When more money is going out than coming in, payroll can be a problem. When asking your employees to hang tight and wait a little longer to get paid isn’t an option, try these solutions:

– Prepare. It is easier to deal with a financial crisis when you’ve planned for one. This requires constant monitoring of your finances and setting aside some portion of your profit for emergencies.

– Borrow From Family or Friends. Before taking out a loan, consider asking people you know to lend you what you need to overcome this temporary misfortune. This is a safer way to borrow money, but make sure to set a reasonable estimated date of repayment. (If their finances are in question, it may be better not to ask.)

– Negotiate. If you are in good standing with your vendors, lender or suppliers, it may be wise to ask them to revise your payment terms temporarily.

Prioritizing Bills.

Prioritizing is a must-learn skill for financial success, and often the best way to overcome challenges. When you’ve hit a financial road bump, consider paying your bills in this order:

– Taxes. When you don’t pay the government taxes, you could face stiff fines and penalties, and the Internal Revenue Service could garnish wages, confiscate your business property and equipment, and seize funds.

– Payroll. If you don’t pay your employees, you risk losing them and your business, and some states laws penalize those who don’t pay wages on time.

– Aged Payables. Pay bills that are 60 days or older, because they can affect your business credit score and accrue a lot of interest.

– Utilities and Rent. These are obviously essential expenses. Try to negotiate with your service providers and landlord to avoid loss of electricity and water, and to avoid eviction.

– Key Vendors and Suppliers. They sometimes need you as much as you need them. Communicate with them about your situation and try to negotiate partial payments while deferring full payment temporarily.

– Secured Debts and Debts You Have Personally Guaranteed. You’re responsible for all your business debts if it is a sole proprietorship or partnership, but if it is a corporation or Limited Liability Company (LLC), you’re only liable for debts that you personally guaranteed, at which time you are putting your own personal assets in jeopardy.

– Insurance Premiums. Although operating a business without liability insurance is not recommended, it may be a short-term solution if premium reduction is not possible.

– Larger Bills. When you can’t pay a portion of all bills, paying larger bills will decrease your chances of reaching delinquency with credit bureaus and could help your credit score.

– Credit Cards. Interest charges can add up fast. Try to make the monthly minimum payment to avoid more debt.

Handling Tax Delays.

Not filing a tax return may prompt the IRS to file one for you, which will most likely not include exemptions you may qualify for. Also, the IRS could assess penalties and interest, increasing the amount owed. The best form of action to take is:

– File on Time. If the IRS has filed a return for you, filing one yourself will likely reduce your liability with new figures and information. A taxpayer who is delayed in filing may qualify for a payment plan, depending on individual circumstances. Contact the IRS to negotiate payment terms. If no contact is made, the IRS may take collection action, which can negatively affect your credit report.

– Enroll in the Fresh Start Program. This program, led by the IRS, offers penalty relief to small business owners.

Learning about finances and taking financial precautions may lead to success for your small business. If crunching numbers is not for you, you may want to hire a certified public accountant to help you plan your financial future.

Debbie McGrew writes and blogs for Debt.org, America’s debt help organization.