Insights
7 Smart Financial Management Tips for Small Businesses
By Melody Yuan
The most effective ways to manage money for your budding business.
What should you be aware of as a business owner in order to save money and stay profitable? Carlos Guaman, the CEO of El Triunfo, a firm that provides accounting, financial and insurance services to small businesses, offers insights on how business owners should prepare, organize and strategize to run their business smoothly.
- The most efficient way for businesses to practice bookkeeping
- Preparing for big expenses and building creditworthiness
- Cut costs only where it makes sense
- Where not to cut costs
- Have the best experts on your side when dealing with international taxes
- Know the baseline required insurances that your business needs
- How businesses can grow and improve their gross margins
The best strategy for book keeping is to have some sort of online system. According to Guaman, CEO and founder of business firm, El Triunfo, having an online system streamlines the process and also helps check against errors. “The one that we use is from Thomson Reuters, called Accounting CS,” says Guaman. “This online system helps business owners personalize their own charts, have access to all of their accounting materials, invoice and account receivable checks, etc. It basically streamlines and centralizes all of their financial activity, which makes life much easier.” By using an online system, businesses can simply enter information into the system and allow financial advisors to help them manage their financials at the same time. There are other options as well, such as QuickBooks Online, where business owners can manage their own funds. “The beauty of online technology is that you don’t have to download any additional software—everything is synced on the cloud so you can access the same database from a phone, tablet or desktop anywhere and anytime.”
From the years that Guaman has worked as a financial advisor, the biggest expenses that he sees are rent, employee costs and taxes. Those three are some of the most important factors in launching a business and, consequently, also the most expensive ones. “How they should prepare,” says Guaman, “is to understand what is needed for an initial investment capital. Here at our firm, we have a list of every single item that are bottom-line requirements to run a business. So, from there we answer the question of what expenses do our clients realistically need? And then we prepare for the first six months of the business. Did you know that most small businesses don’t have the money to continue on for the first six months? They might have enough in the coffers for the first two months—but then they run out of gasoline, and that’s it!” Guaman and the El Triunfo team consistently helps clients figure out how to get from their launch point to a destination—in this case their business goals—the team essentially creates a mini business plan to estimate how long and which paths clients should take to reach their destination.
“Six months is typically the magic number,” says Guaman. “For most startups that we’ve seen, if they have $100,000 at their disposal, they’ll typically survive the first six months.” If that cash is unavailable, businesses are typically advised to look to banks for a loan, or potential partners or angel investors to supplement funds. “If you don’t have that amount of money, you won’t be able to start, I can guarantee that your business will crash within the first couple of months.”
Additionally, another important factor is separating personal funds from business funds. “Don’t ever mix yourself or sacrifice your personal income for the business,” says Guaman, “this is the biggest and most fundamental mistake that most new businesses make.” Business owners should immediately create a budget for their personal expenses and create a separate budget for all business expenses. “Always separate your checking account, savings account and credit cards in order to avoid messy situations later on down the road,” says Guaman. “When your business starts growing, you’ll need to collect dividends and bonuses—all of which need to be under your business and your business only.”
Jose Vega, East West Bank’s small business manager, adds that, “to be eligible for financing, a borrower business must be creditworthy and have the capacity to repay the loan. A bank-ready business is one that is creditworthy and has the capacity to repay at the time of the loan application. All of this takes time to accrue.”
"Six months is typically the magic number for the survival of a startup."
Rent seems to be the one area where businesses could have some flexibility with expenditure. Guaman uses an example, “let’s say a small business projects to make $20,000 to $30,000 a year—given that their biggest expenses would be rent, workers' compensation and taxes, we would have to figure out where we can cut costs on rent.” While much of the rent depends on location, most businesses pour at least one-third of their income into rent. “Two to three thousand dollars a month adds up really quickly,” says Guaman. “When you ask small businesses what their biggest financial concern is, most would reply by saying that they want to be able to continue paying their rent.”
“Most of the time when businesses are feeling the water rising to their necks, they start cutting costs on all fronts,” says Guaman, “and the first to go is advertising and marketing dollars.” While this may make sense in the short-run, cutting marketing costs may mean erasing the presence of your business from the minds of consumers. “Honestly, marketing should be the last thing they consider because that’s essentially cutting off their mouth piece,” says Guaman. “Without marketing, people aren’t going to be aware of your business. You’ll lose all those potential customers and stop attracting new business. Cutting advertising and marketing costs is a declaration that your company is going to go belly-up.”
Guaman recommends talking to someone from the Small Business Administration (you can find their contact information from www.sba.gov), especially to the business owners who are new and coming into the U.S. to do business. Also, seeking out a professional or a service company that specializes in international business or has extensive knowledge on international financials will ultimately save time and money through effective navigation. “Talk to your local banks since they’ll have a business banker that could potentially connect you to a professional who can walk you through the many international laws,” advises Guaman.
If business owners are coming from the other side, namely a U.S. company trying to do business internationally, Guaman recommends connecting with a chamber of commerce in that country to attain as much information and find contacts and service providers who can help you navigate in a foreign country. “At our firm, we do taxes and business consulting for both sides.”
The very first insurance all businesses should have is the general liability insurance, also known as BOP or business owner policy. Why is this so important? For starters, landlords typically ask for this insurance upfront before offering rent space. “If anything were to happen to your business, or if something were to happen to a third party through your business, this insurance will cover the damages,” asserts Guaman. The second insurance needed is a workers' compensation insurance. This is required by law if the business employs people, since a workers' comp will cover medical treatment costs or lost wages. Other insurances that businesses might be interested in could include bond insurance if there is a stake in the bond market, but the first two are mainly the most important ones for any business.
“Absolutely keep track of your finances. All the time. Understanding the movement of money in your business makes you more bankable, meaning that you’ll know what you need to do in order to get different types of loans,” says Guaman. “The problem that many small businesses and startups encounter along the way is that they think they have to do the numbers just to submit forms and taxes at the end of the year.” Keeping track of financial activities and reports every month and making a habit out of reviewing them will make any business owner more acute of their performance, learn about the business’ gross-profit margin and help identify potential problems to then find solutions early on. “If you only wait until the end of the year to review your overall financials, you may not see the details along the way that could make or break your business,” says Guaman.