An article on Forbes stated that, based on a study conducted by a U.S. bank, about 82% of businesses fail due to poor financial management. Similarly, Investopedia points out that the greatest risk for businesses is the lack of money to keep the business running. This highlights the crucial role of financial management in the survival and growth of startups.
Financial management in business is very similar to farming. Businesses need care and continuous attention just as plants do, in order to yield results. Financial management can be broken down into the following phases and steps:
- Planning and Budgeting (like planting seeds in farming): At this stage, businesses should plan financial resources carefully to increase their chances of success.
- Tracking Expenses and Avoiding the Unnecessary (like removing weeds): This step protects businesses from wasteful spending that can weaken them, especially in the early stages.
- Managing Cash Flow (like watering plants): This ensures the availability of funds needed to sustain and grow the business.
- Adjusting Financial Plans (like pruning): Businesses may need to update their plans in response to changes in markets, currencies, and other factors, to avoid risks that did not previously exist or were less obvious.
In the book ‘The Psychology of Money’, the author explains how history cannot reliably serve as a reference to forecast the future in economics and markets. Rare events often carry greater impact than recurring ones. A recent example was the outbreak of COVID-19, which brought the world to a halt and caused many businesses to fail because of their reliance on customers being physically present at shops and outside their homes.
Key Points to Pay Attention To
The following practices help prevent business failure caused by poor financial management.
- Commercial Contracts
Contracts must be written in a way that guarantees the rights of all parties involved. Essential details to include are:
– Identifying information as found in official documents.
– The subject of the contract.
– Contract period, including start and end dates.
– Deliverables and their deadlines.
– Contract value, due dates, and payment methods.
– Rights and obligations of all parties.
– Governing law and the judicial authority in case of disputes.
– Signatures of all parties with dates, with copies of the signed contract provided to each (preferably stamped with official company seals, if available). Some contracts may require notarization. - Bank Account
A common mistake among small business owners is using a personal bank account to receive revenues and pay expenses. Not separating business and personal accounts leads to mixed records, making it difficult to measure business performance. This also affects tax filing, which should include only business-related financial details, presented accurately and with no overlap with personal finances. - Organization and Consistency
Maintaining organization is essential for accurate financial records. Some key practices include:
– Keeping all receipts and invoices organized and accessible.
– Updating records regularly (daily or weekly) to prevent backlog.
– Reconciling accounts monthly to ensure your records match your bank statements and to detect errors promptly.
– Using separate accounts for personal and business finances to maintain clarity and avoid confusion.
Choosing the Right Bank for Your Business
Understand your company’s needs:
What services do you require?
Do you need a basic business account, or more advanced services such as trade financing?
What are your priorities? Low fees, premium service, or a wide range of products?
Read the fine print:
Read the terms and conditions carefully to understand all financial and contractual aspects, including details on products, services, and associated fees.
Leverage technology:
Look for banks that provide online banking and mobile applications to manage your accounts easily anytime, anywhere.
Choose banks that can integrate with accounting software, if possible.
Negotiate:
If your business has a large transaction volume, you may be able to negotiate for reduced fees or additional benefits.
Build a long-term relationship:
Select a bank that values long-term client relationships; this is reflected in their responsiveness, follow-ups, and the quality of answers they provide to your inquiries.
Compare between banks:
Ask other entrepreneurs, especially those in your industry, about their banking experiences.
Look for additional information on bank websites and read customer reviews.
Compare the data you gather to choose the bank that best fits your needs.
These steps will help you select the right bank and avoid problems that many entrepreneurs face after overcoming the hurdle of licensing their business.
Harness The Power of Technology
Many small business owners mistakenly believe that accounting systems are only necessary for large companies. As a result, they rely on Excel or Word files to record revenues and expenses. However, preparing spreadsheets manually requires significant time and effort and remains prone to many errors.
Accounting software simplifies financial data management and allows for easy tracking of revenues and expenses step by step. Transactions such as invoices and receipts can be recorded quickly, ensuring your business is prepared for tax audits.
These programs also offer many features that automate financial operations, saving both time and effort. Most are cloud-based, allowing you to access data anytime and anywhere.
Therefore, it’s time to stop depending on Excel and Word spreadsheets, which expose you to errors and increase accounting risks.
Accounting programs can help with tasks such as:
- Presenting your business with a professional image through standardized templates for quotes, invoices, receipts, and more.
- Eliminating repetitive data-entry, as client, supplier, and bank account info only needs to be stored once.
- Creating a list of services and products with prices, easily retrievable when generating invoices or quotes.
- Calculating taxes automatically.
- Generating advanced accounting reports automatically.
- Sending automatic reminders to clients about overdue payments.
With taxation laws now widespread across most countries, it has become essential to maintain proper and accurate financial management to comply with regulations and reporting requirements.
A practical workshop was held on automating financial management for small businesses. In this workshop, participants prepare their accounting system settings tailored to their business needs in order to automate financial operations.
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