Small and Medium Enterprises (SMEs) face a variety of challenges with their business operations, one being efficiently and accurately maintaining bookkeeping. Maintaining business accounts is vital although without the right tools and knowledge this can be the driving factor which may lead your business to the ground.
Racaza (2022) explains that SMEs main reasons for failure is caused by the follows;
- Lack of financial planning
- Insufficient access to finance
- Lack of resources
- Unplanned expansion
- Poor strategic and financial forecasts
- Excessive fixed-asset investment
- Capital mismanagement
It’s a given in this case that SMEs must have good knowledge and resources to make informed financial decisions to ensure long term profitability. Let’s run through a few methods which you can implement to make better financial decisions when running your business.
1. Set Clear Financial Goals
Your financial goal for the quarter may be reducing overall expenses, improving revenue, improving profitability, reducing liabilities or expanding market share. Set these goals using the SMART objectives (Specific, Measurable, Achievable, Realistic , Time Bound) method to better understand what your goals are and how you intend to achieve them. By doing so you have your objectives set clearly which helps when the most turbulent times are upon the business, whilst also helping you to make the right decisions based on your priorities.
2. Create a Detailed Budget
Part of the organization of your accounting, keeping your budget clear, concise and detailed allows you to better understand your financial situation, providing you with the best level of transparency that you require.
3. Track Income and Expenses and Incorporate Technology
Maintaining your financial statements is crucial to gain insight on your business’s health and current standing. Use accounting software to automate bookkeeping, facilitate financial statements and to generate financial reports to help make this process efficient, convenient and to reduce the amount of human error.
Additionally, exploring cash flow forecasting tools, expense tracking apps and cloud based financial platforms allows you to track your current income and expenses and to understand the possibilities of the future period’s performance to better understand your business’s progress and financial stability.
4. Separate Business and Personal Finances
If you are a SME that does not have its own separate bank account, it’s time to set it up. It is very important to ensure your personal and business finances are separate to easily manage taxes and to get a clear understanding of your business’s financial stability clearly. Further it helps to protect personal assets from business liabilities.
5. Establish an Emergency Fund
A backup plan is better than nothing. Ensure you have created a contingency fund for your business where the cash is exclusive for unforeseen business expenditures or to help maintain liability costs during periods of low revenue. This cash should not be used casually. Similar to personal savings, treat this fund as a business’s savings which is tapped into only when needed.
6. Manage Business Debt
If your business has outstanding debts, plan out how you will pay your debtors according to the time and accrued interest rates. Keeping debtors for a long period of time makes it harder to pay them off. Additionally, ensure you have a healthy balance between debt and equity to ensure you do not get cornered into financial risk in the future.
7. Optimize Tax Planning
Ensure you are familiar with the applicable tax laws for SMEs. Get professional help to identify credits, tax deductions and incentives. Efficiently planning your taxes helps you to minimize your tax liabilities.
8. Implement Effective Invoicing and Payment Systems
Have discipline in your methods of finance management. This means to streamline your invoice process, keep clear communication between your accounts receivable and follow up on them promptly when they are overdue.
Additionally, using accounting software for this process to automate some of these processors or to streamline and make these processes efficient can greatly benefit your business.
In conclusion, staying on top of your finances is crucial in determining your business’s financial stability and gives you a better understanding on how your finances operate, while allowing you to see potential issues before they occur and to be ready in case your business is going through a turbulent time period. Regularly reviewing financial performance and seeking professional advice is valuable in addition to these steps to ensure your progress is done correctly.