Important Financial Decisions Every Small Business Has to Make

Running a small business involves various responsibilities, including making critical financial decisions that could significantly impact your company’s performance. Wrong financial decisions can lead to unexpected costs and business failure.

While several industries survive and continue to be profitable, data from the Small Business Administration (SBA) reveals that less than 50 percent of businesses survived for more than five years between 1994-2019. Businesses can fail for many reasons, and finance-related issues are usually one of the most significant concerns. A critical component of operating a successful business is making important financial decisions, some of which are discussed in this article.

Create an Emergency Fund

Emergencies can occur anytime and, in any form, whether your business is new or well-established. Financial fluctuations occur in a business due to tax payments, slow periods, and economic changes. If you don’t have an emergency fund, your business may turn to business loans or lines of credit. However, these funds can be expensive due to their high-interest rate and often take time to secure.

An emergency fund provides your business with a safety net, allowing you to handle unexpected costs without falling into debt. Setting up an emergency fund and putting it in every month gives you security and reduces the risk of business failure.

Maintain a Budget

The biggest mistake small businesses can make is neglecting to make and follow a realistic budget. Budgeting is crucial in ensuring organizations have the resources to execute initiatives and reach goals. A budget allows businesses to outline their expenses, evaluate potential profit, reach business goals, and anticipate any operational changes required.

Although budgeting is a crucial element for business operations, the task can be challenging to complete for small businesses that don’t have a clear idea of their earnings. The good news is that small businesses can maintain an adequate budget by using multiple accounts. To use multiple bank accounts for budgeting, your company will need to open dedicated expense and reserve checking accounts and allocate specific amounts of cash to each. This method requires you to clearly understand the types of expenses your business has and the best way to categorize them. Use a reliable banking and money management platform catered to small businesses to streamline the budgeting process and make sound financial decisions.

Manage Employee Payroll

Payroll management is crucial for businesses as it helps businesses improve employee engagement, productivity, and regulatory compliance. As an employer, if you don’t have an efficient and accurate method of paying employees, maintaining records, and filing taxes, you may have to deal with wage claims and expensive penalties.

Implementing an effective method to manage employee payroll will also give you an accurate picture of how much of your cash flow is going toward your profits. Labor can account for up to 70 percent of total business costs, including employee wages, benefits, payroll, and other related taxes. So, managing payroll is imperative, as all labor-related costs are typically included in the payroll management process.

The key to increasing financial visibility and managing your business’s cash flow is dedicating time and resources to make informed financial decisions. As discussed in this guide, being strategic with your finances involves creating an emergency fund, maintaining a budget, and managing employee payroll.