Owning and running a small scale business enterprise is not a walk in the park. It is a lot of work that demands so much discipline, due diligence, and commitment. Your business entity may not be as large as some other big business ventures, but that doesn’t make your work any easier. If anything, you have a tougher job in running a small business especially if you are building the business alone. Unless you don’t want it to grow.
20% of small business enterprises crumble in their first year, while about 50% of them fail after five years. Numbers don’t lie. The statistics go to show the rate of failure in the small business ecosystem and this is largely due to several factors which include poor financial habits.
One of the things every small business owner must do to avert the impending failure that faces most businesses is to develop smart financial habits from the very beginning. In this piece, we will be sharing some of the smartest financial habits every small business owner should imbibe. Are you currently running a small business or planning to start one, go through the tips below and digest them thoroughly.
Some smart financial habits you can develop as a small business owner are –
- Keeping Financial Records
- Proper Inventory Management
- Maximizing Supplier’s Credit
- Using Customer’s Funds to Buy Products
- Using Financial Leverage
- Using Productivity Tools instead of hiring new workers
Keeping Financial Records
Top on the list of our recommended smart financial habits is the practice of keeping proper financial records. Keeping a good financial record helps small business owners to be fully aware of their cash flow. Cash flow is the livewire of every small business. As a small business owner, you must always know how money is coming in and how it is going out. Getting a grip on how cash is flowing in and out of your small business daily can determine whether you will succeed or fail.
There are several reasons why keeping good financial records is one of the smartest things to do as a small business owner. Aside from the fact that all businesses are required by local laws to do so for efficient taxation purposes, it will put your business in a position to be creditworthy. A lot of small businesses are financially excluded as a result of poor financial record keeping. Good financial record-keeping makes access to financing easy no matter the kind of finance; equity, loan, or business grant.
Financial records show the overall health of your business and help you make informed decisions for business success and growth.
Proper Inventory Management
Inventory management is so crucial to the survival and growth of a business. When you understand that the success of every business depends on how much the business can capitalize on the economics of demand and supply, you will find inventory management an invaluable habit to adapt.
Inventory management is a smart financial practice because it helps small businesses create a balance between what is in stock and purchase order. Too much or too little inventory can put a clog on the wheels of your business progress. When you have little inventory, you will not be able to meet the demands of your customers and they gradually begin to lose faith in you. Also, when you have too much inventory of a product that is not fast-moving, it ties up business funds for you. This is not good for the growth of any business. The idea is to maintain a balance by embracing good inventory management practices and there is software like
Maximizing Supplier’s Credit
We have mentioned the importance of cash flow for small businesses. Any practice that helps you not to tie up cash is a smart financial practice. One of the smart financial habits to also consider is exploring the supplier’s credit. Successful business owners have learned how to leverage the supplier’s credit to grow their business.
What is Supplier’s credit? Supplier’s credit is simply an arrangement that allows you to access goods from the supply on credit and pay up in installment as you make sales. Taking advantage of contracts or agreements like this has helped a lot of small businesses become big. Supplier’s credit is a smart way to stock up your inventory without tying up cash.
Using Customer’s Funds to Buy Products
Restocking or buying products is a recurring operational expense for small business owners. At the initial stages of your businesses, it is understandable to fund reoccurring operational expenses with loans or equity financing but that is not sustainable over time. It is not a smart financial habit for any business.
Small business owners must be quick to learn the habit of funding recurring expenses like product purchases from revenue or customer funds. That shows evidence of a healthy cash-flow. A lot of business models are designed to mop up funds from customers first before sourcing and supplying them with the products. That way you use the customer’s funds to buy products. This is a smart financial strategy for small businesses with limited cash.
Using Financial Leverage
The power of leverage cannot be over-emphasized. Financial leverage is a smart way for small business owners to grow the bottom line of their businesses beyond their natural capacity. By financial leverage, we mean debt financing (loan). There is bad debt and there is good debt. Capitalizing on good debt to grow your small business is a smart financial strategy.
The trick is not in just accessing a loan, as loans don’t just do the magic. The idea is to ensure that you only acquire the leverage that you need to double or increase your profit. Do not ever collect more than you need. This is why at Lendigo, we ensure we only give business owners loans that their businesses are eligible for and can comfortably pay back. We do this by reviewing the business’s performance over a 12-month period from the business’s bank statement. As a business owner,
Using Productivity Tools instead of hiring new workers
Running a lean operational structure that reduces the cost of operations is a smart financial habit that can help small business owners to break even and increase profit significantly. There are many ways to reduce the cost of operations for small businesses and one of them is by reducing overhead costs (salaries/wages). This can be done effectively by deploying productivity technologies that will improve the efficiency of your business operations.
More businesses have been able to succeed by leveraging technology tools that helped to improve their performance and increase revenue. These technologies are aimed at solving specific business challenges and opportunities leveraging productivity tools
As a small business owner, it is not smart to start shouldering the cost of hiring an accountant, when you can get an accounting tool or hire an HR manager when there are productivity tools that can help you with team and payroll management. You can for a wide range of business functions from inventory management to email marketing, telemarketing, team collaboration, project management, and accounting.
With an ever-changing world and business environment, small business owners must embrace smart financial and business habits that will enable them to compete effectively and build a sustainable business venture. The tips we outlined above are highly recommended for every small business owner who wouldn’t fall into the bucket of the great percentage that will fail in their venture within the first one year or five years. Business intelligence is a strategy and financial intelligence is an integral part of your overall business intelligence.