Guide to Managing Small Business Finances in 2022

Revisit Your Business Plan

Remember: first and foremost, a business plan acts as a guide that steers you towards your optimal outcome. Your business plan maps your market, your key revenue drivers, the components of your cost base, your short and long-term goals and milestones, among other things. With that, it’s important to remember that your business plan is a living document. You should constantly be engaging with it to understand if you’re doing all that you need to do to be successful.

"One thing you can be assured of as an entrepreneur, your business plan will change from its original vision. Flexibility and adaptability to change is one of the most valuable traits of a successful entrepreneur. That also means that your fiscal priorities will change. It's so important to have the discipline to step back and update your business plan in accordance with the reality of how the business is evolving and align that plan with your finances."

Once you’ve built the infrastructure necessary to get key financial information laid out in front of you, return to your business plan and evaluate how you’re doing. Think about these questions in the context of the relevant numbers:

• Were you right about where your revenues would come from?
• Were your past financial projections accurate and/or realistic?
• Are you seeing unexpected or unexpectedly large, costs?
• Given your current and projected finances, is the business sustainable?
• Have you hit your financial goals and milestones?
• Given the circumstances, is there a reason to revise your plan?

With the answers to these questions, you can start to evaluate potential next steps for your business.

Are you an aspring small business owner thinking about putting together a business plan. Check out this helpful blog from Biz2Credit that explains everything you need to know about writing your first business plan.

Build Out The Key Financial Statements

With your financial data available, you can put together the three key financial statements for any business. By combing through the relevant documents, you can build these statements to help you get ahead in terms of financial planning.

Balance Sheet: This statement lists all of the assets and liabilities tied to your business. Assets include everything of value that your business owns. They can include anything from inventory to equipment to real estate, but can also include intellectual property or brand value. Your liabilities include anything that you owe to creditors and any paid for services not-yet-rendered. This could include anything from outstanding debt to payroll. The details of this statement help business owners understand their financial position and inform valuation calculations for your business.

Income Statement: Also known as the profit-and-loss statement, the income statement details all of your revenues, gains, expenses, and losses during a set period of time. It gives you a full picture of your current operation’s current profitability and all of the relevant components to that profitability. Income statements guide small business owners through a number of decisions including possible expansions, cost-cutting procedures, and operational reforms.

Cash Flow Statement: A cash flow statement details the movement of funds into and out of your business. It includes the following data:

• Operating Cash Flow: Any cash flowing into or out of your account from the day-to-day operations of your business. Payments for your services and payments for materials/inventory are included here.
• Investing Cash Flow: This includes any income or expenses associated with your business assets, including equipment and real estate.
• Financing Cash Flow: Though this may be less likely with smaller operations, these ah flows involve anything related to a company’s stocks or bonds. These can include dividend payments or equity investments.

Taken together, these three statements provide a full and honest picture of what’s going on with your business. The projections built into these statements are also powerful, as they’ll give you an idea about how your business will progress in the future. The information from these documents will help you to make informed decisions about your small business.

It may be worth enlisting the help of a professional business accountant on a regular basis to help you to compile and analyze these statements.

Develop and Analyze Financial Projections

If you have plans for expansion, the launch of a new product, or to hire more employees, the key question that you need to answer is whether any of these decisions are financially viable. The best way to do this is to make predictions about how your business will perform in the next year.

While financial projections can be complex, complicated, and overwhelming, we’ve listed the two most important projections for small business owners to be aware of, outside of the projections built into the 3 essential financial statements, that inform management decisions for the coming year.

Sales and Revenue Projections

Using the past year, or few years, as a reference, you can predict what you expect to make in the following year. Incorporate the price of your products, the cost of goods sold for each product, and your expectations for the number of customers and sales that you will have in the next year. The results of these projections can have a number of implications.

For example, you may find that your expected sales will be too much for your current salesforce or production capabilities. If this is the case, it’s time to think about hiring some more people or improving your equipment. If the opposite is true, it’s time to think about how you can boost those numbers to ensure that your operations will run at full capacity and what that means for your finances.

Additionally, you could find products in your analysis that are underperforming, doing much better than expected, or that are bogging down resources that could be used better elsewhere. With this in mind, you can make strategic decisions concerning how you can allocate your business’s resources most efficiently.

Budget for Expenses

In this projection, you should look at your operating expenses. The costs of running a business can be broken down into two broad categories: fixed and variable costs.

Fixed costs include things that are constant no matter how much business you do. This can include things like rent or equipment purchases. Variable costs change depending on how much business you do. This includes things like hourly wages for employees, commissions on sales, supplier costs, and distribution costs.

Given your past operating expenses and your expectations for where you will have to spend your business’s money in the coming year, you can project what you’ll need to budget for expenses.

While you don’t need to have super-detailed and exact figures, a general understanding of where you will stand in terms of operating costs for the next year is very important.

For example, you may find that your projected revenues won’t be able to cover expected expansion costs and thus you may need to look into business financing options. Or maybe you will find that a particular product has out of control variable costs that could be improved with a change of supplier agreements. Maybe it's time to contract freelancers to save on labor costs, or launch ecommerce platforms to reach a new audience.

Engaging in diligent expense tracking and analyzing your expenses, or cost-base will give you key information necessary to determine if your business will be sustainable in the long run and inform ways that you could bring down expenses to boost profitability.

Avoid Large Fixed Costs Through Strategic Partnerships

If you’ve identified opportunities to expand your operations, the first thing that comes to your mind is the start-up costs. Launching a new product or purchasing new equipment can be very expensive, and the risk that your new opportunity or strategy doesn’t play out financially in your favor can deter most small business owners from pursuing them.

However, if you play it smart you can avoid the initial costs all together while you test new ideas and new products. If you do your homework, you can often find existing capabilities for your new opportunity in the hands of other entrepreneurs like yourself. By partnering with people who have already committed the investment that you have been thinking about, you can both help them to make back their investment and pursue your opportunity while offloading most of the risk!

“When I was thinking about launching my Vodka brand, I was told over and over again that the market was too crowded and that it wouldn’t be worth the huge upfront cost of setting up a distillery. They were right! It was tough to rationalize the fixed cost with the risk that you might not get to the capacity necessary to make things worth it. With this in mind, I found an existing distillery who was looking for ways to up their capacity and partnered with them to produce my product. In one move I sidestepped the fixed costs of launching a Vodka brand and was able to test my product in the market.”

Tim says that this is a key lesson for all entrepreneurs. By finding strategic partners in your target market who have already made the investment you need, you can avoid large upfront costs while still pursuing new, potentially lucrative ideas.

Take Advantage of Business Credit Card Rewards

If you think credit card points are only for clever travel hackers, you’re missing out. While credit card debt can be extremely expensive, rewards programs can be an unlikely source of cash that you can use to improve your finances.

There are tons of business credit cards on the market, all with their own unique perks and rewards. By strategically using credit cards to pay for your expenses, you can earn a substantial amount in cashback.

For example, restaurant owners spend a lot of money paying suppliers for what they need to serve food on a daily basis. If you spend $1,000,000 every year on supplies and can earn 2% cashback by paying for those supplies with a business credit card, you’ll get an extra $20,000 per year to use to fund your financial strategy.

There are plenty of examples of savvy entrepreneurs using this technique. As long as you stay on top of your credit card bills, you can leverage rewards programs and generous sign-up bonuses to boost your finances.

Leverage Innovative Business Financing Options To Supercharge Growth

One of the most common things holding small business owners back from growth and success is a lack of capital. Being proactive about business financing is an important part of diligent financial management. Your analysis of the current state of affairs and projections of the next year should inform whether or not you’ll need an infusion of capital to reach the goals laid out in your business plan.

While traditional banks are an obvious source of funding, your search shouldn’t stop there. There are lots of innovative online lenders (like Biz2Credit!) who focus specifically on providing effective and flexible financing options to small businesses. These lenders often provide more amenable terms, seamless experiences, lower interest rates, and a higher level of expertise when it comes to small business capital.