Running a small business is big pressure. For business owners who proactively manage debt, receivables, expenses and taxes, you can position the company for future success. That success also relies on the ability to obtain financing to secure inventory, purchase equipment, hire employees, and fuel a host of other strategies to grow the business.
Get your business in top financial shape to fund growth and improve your credit worthiness by following these strategies that will help improve the long-term stability of your company:
- Improve Your Credit Score:
Credit has a large impact on your ability to acquire business financing. Credit reports are one of the tools lenders use to determine a borrower's credibility. When you apply for business loans or credit cards, lenders will perform a business credit check and a review of your credit score to determine how much of a credit risk your business poses, based on past financial behavior. Personal FICO scores range 300 to 850; business credit scores 0- 100.
Avoid the pitfalls that can tarnish your credit such as failing to check credit reports through agencies such as Equifax, Experian and TransUnion. Failing to notice incorrect or false information could harm your score and financing terms, so make a plan to resolve the issue fast. Make it a point to avoid late or missing payments. Keep balances low on credit cards and other revolving credit. Once you have established and worked to build up good business credit, be sure to monitor and protect it.
- Separate Finances:
Be proactive about distinguishing between business and personal expenses. The best ways to keep a solid boundary are to establish a business bank account and applying for a business credit card. Separating your spending is crucial for a few reasons, including the fact that it provides personal liability protection in case someone takes legal action against your business. Having your business financial information separate makes it easier for you to accurately compile financial information (financial statements including a balance sheet and P&L statement) for lenders, investors, auditors, and accountants. Being disciplined about separating your business expenditures, establishing your business entity and applying for a business credit card so business expenses are not being charged to a personal credit card will pay off in the long run.
One of the biggest pitfalls of co-mingling business and personal finances is it muddies your overall financial picture and can lead to a cash flow crunch. If you have an unreliable gauge of outgoing expenses and incoming revenue, you risk having inaccurate financials that will potentially harm your ability to secure future financing. Another pitfall is tax-time headaches. For federal income tax purposes, you need to keep accurate books on your business. This can only be done if you have a business bank account dedicated to your business into which you deposit income and from which you pay expenses.
- Manage Your Cash Flow:
Keeping your business on a growth trajectory comes down to good cash flow management. Cash flow refers to the cycle of funds coming in and out of your business. It is common for business owners to experience a periodic cash crunch. To gain better control of your cash flow, keep a close eye on your operational expenses and payment practices. Implement new policies to improve accounts payable and receivable such as offer discounts to customers who pay early, use electronic payments for bill payment and negotiate better terms with your vendors and inventory suppliers. Avoiding a cash flow crisis will help you to quickly settle debts, reinvest in the business, pay expenses, and provide a healthy buffer of cash reserves in the event of an emergency.
This example and diagram will help you visualize how to calculate cash flow:
Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure
Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital
Cash Flow Forecast = Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash
- Pay Attention To Taxes:
Taxes are a daunting subject for most business owners. You have to plan for estimated taxes, self-employed taxes, state and local taxes, sales and use tax, and other tax compliance issues. In addition, having erroneous and late payment on your taxes can derail dreams of future growth. Avoid these common pitfalls to reduce stress and penalties come tax time:
Underpaying estimated taxes: Business owners should generally make estimated quarterly payments if they expect to owe tax of $1,000 or more when their return is filed.
Failing to withhold employment taxes: A payroll tax is withheld by employers from each employee's salary and is paid to the IRS. Any business with employees must have a system in place for handling payroll activities and paying payroll taxes correctly and timely. If you have contract employees, you will need to send them a 1099-MISC Form.
Filing late: Just like individual returns, business tax returns must be filed on time. To avoid late filing penalties, be aware of all tax requirements for your type of business and the filing deadlines as each business entity has different filing dates.
Not hiring an expert: Consider hiring a CPA or bookkeeper. These professionals can help streamline the tax process by managing your books every month, compiling your tax information, and ensuring your taxes are free of errors and filed on time.
- Devise An Annual Budget:
Your budget is the financial road map for your small business and the easiest way to make sure you find yourself on track financially. A well-planned and executed budget can help ensure your business is ready to take on new opportunities and has financial safeguards in place should a surprise strike. A budget should include cash flow, profit and loss, sales, pricing, gross margins, net income, total inventory and your fixed and variable expenses. Your total expenses deducted from revenue will help you calculate your profit in which will be the foundation for your annual budget.
From that point, it is recommended to enter your expenses and revenues into a cash flow and financial projection that shows monthly inflows and outflows for 12 months of operations. You can use your cash flow projections to prepare annual projected income (profit and loss) statements and balance sheet projections. An important aspect of your financial projections is your assumptions. These financial forecasts are needed in order to secure a loan or investment. Some common financial assumptions include macro-economic, financing, depreciation, taxes, operations, maintenance, and revenue assumptions.
- Maintain Banking Relationships:
Take the time to cultivate banking relationships that can be leveraged when opportunities or threats confront your business. The relationship you develop with your business banker should go far beyond a loan and a checking account. Your banker can provide perspective and help you explore potential solutions to financial problems. They can be integral in helping you strategize ways to grow your business and reach your financial goals.
Avoid common pitfalls of not researching the right banking relationship such as selecting the wrong business loan for your needs, not considering your proximity to the financial institution and overlooking your digital needs when it comes to mobile and online banking.
When it comes to running a business, having trusted relationships is essential. Savoy Bank provides entrepreneurs and business owners personalized service and solutions to solve problems and achieve goals. Whatever your need, Savoy’s Success Team is standing by, ready to assist you with any questions and to direct you to the appropriate banking professional. Contact us at 646.775.4000
Mac Wilcox is the President and Chief Executive Officer of Savoy Bank. With more than 20 years of experience as a banking leader and entrepreneur, Mac is a strong believer in small businesses and the power of local entrepreneurs to drive economic development and growth