Money is at the root of every successful business, large or small. If your business lacks capital, the business fails. If it can’t make money, it fails. Even the most successful entrepreneurs can lose sight of the basic principles, but these 5 tips can help keep your small business in the black.
1. Manage Accounts Payables and Receivables
At its core, running a successful business revolves around making sure that you make more money than you spend. You do that, and you turn a profit. Not paying attention to your accounts receivable (money you can collect because you sold on credit) and accounts payable (money you owe because you got something on credit) ignores that core principle and can cost you your business.
Small businesses work with such a narrow margin of error that you must simultaneously give yourself room to breathe in case things go wrong and take risks to get a jump on the competition. Manage your accounts receivable so you’re never caught owing so much that you can’t afford producing your offering the following month. Make sure to collect on what people owe you so you have a clearer idea how much you have to work with.
2. Diversify Revenue Sources
Having a small set of loyal customers feels amazing for a small business. They represent a consistent source of revenue upon which you can base your plans. Unfortunately, relying on them entirely is like building your office on sand. It may seem stable, but could quickly sink if the tidewaters change. You never know when your clients will change direction or end their contract with you.
Don’t rest on your laurels. Keep marketing, keep looking for new clients. You don’t necessarily have to offer a new product, but consider improving your current offerings. Think of your constant search for new clients as a safety net. If your primary client base falters, you have something that’ll keep the company from crashing.
3. Pay Only What You Must
When a small business pays too much for anything, it endangers its future. Every time you overpay for raw materials or employees, you have less to spend on other aspects of the business. It will add up eventually and leave you wondering where everything went wrong.
Taxes, for example, are where many businesses tend to overpay. Make sure you have any and all relevant receipts and look for claims you can make. Talk to a reputable CPA and learn about your options. If you don’t put in the work, you may end up paying twice for everything you’ve bought for the company. Make sure your accountant knows the company and its workings intimately.
Office equipment can become another money sink if you let it. Luxury items or more advanced desks aren’t necessary. It would be nice if all your employees could get adjustable desks that let them work standing or sitting as they choose, but that essentially doubles your expenditures. Don’t cut corners, but don’t splurge on features you don’t strictly need either.
4. Internalize Your Profit Margins and COGS
Offerings cost money. It will cost you to make them, deliver them, and store them, among other things. This cost is COGS, or “costs of goods sold”. This is every expense required to produce whatever you’re selling. This doesn’t just include how it is made – labor costs, customer conversion costs, and more, all factor into your costs. You want this number low so that every item you sell results in more profit.
However, you can’t cut on costs too much, or offering quality will suffer. It’s a mix of art and science, art in figuring out what people are willing to pay for and what they’ll enjoy, science in that you’ll need to calculate how much to price it. Random pricing doesn’t work. Pricing against your competition requires an in-depth knowledge of what every aspect of your offering cost. Keep those in mind and you’ll manage your money better.
5. Respect Time as You Would Money
The reason many successful business owners opt to outsource work or hire cleaning staff is because it saves or even makes them money in the long run. Small businesses cannot afford to waste time, as time wasted is money lost. You hire a cleaning service not just because it keeps the office tidy, but because it relieves some pressure off your employees. Instead of having to dedicate time to cleaning things, they focus their energy on getting things done.
This also goes for task allocation. A sick employee can cost you money, as they won’t be as productive as they would be if they were well. Burnout can also cost you money, in the form of turnovers and sickness. Share the load.
These aren’t the only things a small business should keep in mind when managing their money, but it’s a good start. If you’re wondering what else you can do to keep your numbers high, think proactive. Reacting to problems is rarely a good idea, and that goes double for money. You may only realize there’s a problem when it’s big enough to grab your attention. Take initiative, and keep those problems from happening in the first place.