By Sarah Davis,
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Keeping track of your small business’s profits is easy, but developing a deeper understanding of its overall financial health is more of a challenge. Lots of entrepreneurs assume that their venture must be financially secure if they’re making plenty of sales, but this isn’t always the case. All too often, small business owners don’t realise there’s a problem until it’s much too late, which can send them right back to the drawing board or means their business folds for good. To avoid disaster, start looking after your business’s financial health earlier rather than later.

If you’re not sure how financially healthy your small business is or even where to start, then this blog will point you in the right direction. It will help you to understand how you can go about assessing your venture’s finances as well as offer some tips on what you can improve.

Track your income

While your income isn’t the only thing that determines your financial health, it’s nearly impossible to continue running a business if it’s not making any money. Income is usually the first thing that entrepreneurs pay attention to when launching their start-ups, but it’s easy to lose track as time goes by. You might know you’re making money because of the number of sales you’re getting, but are you paying attention to how much you’ve made each week? If you’re guilty of getting swept up in the excitement of seeing money rolling in yet failing to keep careful records then your business might not be as financially healthy as you think.

One of the best ways to track payments (and make sure you’re actually getting paid for every job) is by using invoicing software. Using this alongside your current accounting solution will help you generate and send out invoices automatically as well as keep an accurate log of every sale you’ve ever made. Some types of invoicing software will even be able to create reports so you can monitor income trends over time.

Don’t dismiss expenses

To accurately assess whether your income is actually enough to keep your business afloat, you must pay close attention to your expenses, even the small ones. It’s easy enough to track expenses such as raw materials or the money you have to pay your employees, but there are other costs it can be even easier to forget about. These include things like energy bills and travel costs, which can quickly start to add up.

One of the biggest expenses that small businesses fail to consider in their first year of trading is taxes. It’s important to try and estimate how much tax you’re going to need to pay at the end of the financial year so you can set that money aside. Failing to do this can mean your business will end up in a lot of financial trouble further down the line.

Understand your cash flow

When you’re first starting out, your business’s cash flow might not be as regular as you’d like it to be. This is understandable for the first few months or during the first year of trading, but do you have a concrete plan for improving cash flow stability in the future? Not having enough capital to keep your business turning over smoothly leaves you in an incredibly vulnerable position. While you might be able to get by, you could start to find yourself in hot water as your business grows. Not only will you be toeing the line between actually making a profit and losing money on a regular basis, but you’ll struggle to develop your services and better your venture.

The first step to improving your cash flow is understanding exactly where you’re going wrong. For example, are your clients consistently paying you late? If so, it can be a good idea to ask for upfront deposits to help your business run more efficiently. Alternatively, if the cost of your raw materials is outstripping the profit from your products, it could be time to rethink your suppliers or pricing structure.

Stay on top of debts

Finally, if you took out a loan to get your venture off the ground make sure you keep an eye on your repayment plan and interest rates. It’s easy to dismiss money you’ve already spent, but if your loan repayments are due to increase dramatically after a grace period, your business may not be able to survive. It’s very difficult to avoid debt of any kind when running a small business, especially if you need to take out loans as a result of a struggling cash flow. However, there’s a right way to manage debts and paying off what you can before applying for more loans is one of the best ways to avoid financial difficulties from overwhelming you.

Your business’s financial health isn’t something that you can fix overnight, but being aware of any problems instead of glossing over them will benefit you massively in the long run. If you have any real issues you’re struggling to iron out, remember you can always speak to an accountant or financial advisor for help.

Sarah Davis
Sarah Davis
Sarah Davis is a business executive specializing in mergers and acquisitions, corporate finance, and international law. She achieved her MBA from Cornell University after completing a legal undergraduate at UC Berkley. Sarah runs her own business consultancy firm in tandem with working alongside the FinImpact team.

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