Being a small business owner can be exciting and frightening at the same time. Every business owner has their own reasons for starting a business as well as hopes and dreams for that business. But owning a small business is more than hopes and dreams and offering a product or service.
Addressing the financial aspect of your business is a key component to growth, and is often seen as the most difficult part of small business ownership. Going in to the New Year is the perfect time to review the business goals you have set for the upcoming year and to take stock of your business financial goals. Setting financial goals is a step towards success as an entrepreneur. Without financial goals and planning, you don’t have any direction or path to reach a goal for success. Don’t simply think about revenue and money earned, set out a plan of action. Step back and figure out where you want to take your small business, set clear goals, and re-evaluate them regularly.
Enter into the New Year feeling confident in your business financial planning by using the following tips to help on the path to setting sound financial goals for your small business:
Probably one of the most important things you need to know as a small business owner are basic accounting principles as well as accounting tips. This type of knowledge is a tool that allows you to understand your financial data and what it actually means. When reading financial documents like income statements, you should be able to identify how each line item impacts your overall financial picture. Understanding accounting principles may not sound like the most exciting aspect of owning a small business, but it’s important. If you’re not familiar with them, a Certified Public Accountant (CPA) may be able to help. A CPA can also help you with other areas of your financial goal planning like helping you make tax-efficient decisions that support your business in the long term. Knowing what the numbers mean will help you better set up your financial goals and plan accordingly so that you achieve those goals.
Once you understand your numbers, it’s time to set up your goals. The point of setting goals is to give you something to achieve, and you want to hit those goals — both small and big. In fact, it’s important to set both micro goals and macro goals. Micro goals are the smaller, easier-to-achieve goals that help you reach your macro (larger) goals. When you only set forth macro goals only, they’re often intimidating and unrealistic. And the truth is, it can be easy to set goals that are unrealistic and set yourself up for failure or going the easy route with goals that are way too easy to reach.
You want to set realistic goals that are just hard enough to keep you motivated, but not so hard that you give up right away. So how do you do that? Think S.M.A.R.T. The acronym stands for Specific, Measurable, Attainable, Realistic, and Timely. Vague and far-off goals don’t set out the actual path to achieve them. But S.M.A.R.T. goals give you a direction. For example, increasing sales by 35% within three months through a XYZ marketing campaign and using daily metrics to compare revenue and profit increases.
No matter your business size, it’s important to really understand your expenses and how they impact your revenue and your bottom line — profit.
Revenue consists of all income generated by business activities during an accounting period. Often, small businesses base success on increasing revenue, but not all revenue is good revenue. It’s important to note the difference between revenue and profit, however. Profit is your bottom line — it’s what remains of revenue after expenses. It’s possible to have profits without revenue, so understanding your expenses is crucial to understanding numbers and setting goals. When revenue goes up, often the costs do as well. That means your small business isn’t actually making more money. If new revenue means you need to incur more costs, you might want to look at your expenses to see how you can increase your profit margin.
Cash flow management is a vital part of operating any business. According to the Harvard Business School, “Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time.” Cash flow can be positive or negative where positive cash flow means that your company has more money moving in than out and negative means that there is more moving out than into the company. A positive cash flow lets you meet current business obligations, like paying employees and purchasing raw materials, while also allowing you to build a reserve for investments and emergencies.
It’s important to perform a regular cash flow analysis that will let you see how much money is flowing in and out of your business so that you can plan accordingly. These analyses, when done regularly, will help give you historical perspective and be able to determine the amount you should set aside as reserves.
Doing your personal taxes yourself is one thing, but business taxes are much more complicated and time-consuming. Taxes done incorrectly can spell trouble. There are numerous accounting mistakes that cost small businesses. From not understanding tax laws to not keeping proper records, you could be decreasing your tax liability and costing your small business money. You may want to save money doing the taxes yourself, but this is one time you shouldn’t skimp. Hiring a tax planner or CPA reduces tax liability. As a bonus, it frees up your time to focus on running your business.
According to Guidant Financial, “55% of entrepreneurs say their biggest motivation for starting their own business was the idea of being their own boss.” Furthermore, pursuing their passion was what compelled 39% to start their own business. No matter the reason, no matter how passionate you are, you must set your emotions aside and deal with facts and numbers from a business perspective. Set forth your financial goals around the business aspect only. Recognize that your small business finances, while often similar to personal finances, are different and should be treated as such. Don’t simply think of business goals as a means to reaching personal financial goals.
For more information on how 4Corner Business Service can help your small business, contact 4Corner Business Services today.