6 Small Business Finance Basics You Must Know

Finance is the foundation of a business. Its effective management is the essence of running a small venture without the risk of failure. It helps in maintaining a healthy cash flow that sustains the entity through unforeseen challenges and dry spells. Thus, entrepreneurs planning to purchase a business for sale in Australia must have the basic knowledge of financial management to operate a sustainable entity and make informed decisions.

Understanding finances helps in easy comprehension of the statements, bottom-line, debt management, investments, tax season, funding, expenditure and much more. It helps the entrepreneur to steer the venture into the direction of prosperity and proliferation. So, here are six small business finance basics that you must be familiar with before taking the plunge.

1. Tracking all Transactions

The first rule of managing finances is to keep track of all the money coming into the company and going out of it. Every entrepreneur must pick a suitable bookkeeping system according to the needs of his/her small business to record all the transactions. Every expense and income must be entered into the books in a meticulous manner without fail. From a small travel meeting expense to an expensive equipment purchase, the details of business expenses should be recorded carefully, and the bills should be preserved for future references. Also, the business and personal expenses should be separated from the beginning to avoid any ambiguity during the tax season.

There are several transactions that need to be recorded carefully, including customer invoices, purchase orders, deposit slips, payroll cheques and cancelled cheques. This information is significant for the generation of financial statements like balance sheets, profit and loss statements, cash flow statements and claiming tax deductions. It aids in the creation of sales reports, inventory management reports, payroll reports, bank reconciliation and much more. Thus, a streamlined and systematic following of the incoming and outgoing capital is a must for every business to manage its funds, budget and projections.

2. Understanding Operating Costs

Expenses are inevitable when you are running a business. However, they need to be restricted to maintain a financially stable venture. Some of the fixed operating costs include payroll, inventory, maintenance, lease, insurance, taxes, etc. The bookkeepers hired by the business can help in lowering the operating costs to improve the flow of capital in the business. Cost-cutting is an effective tool that most successful entrepreneurs utilise to keep their businesses afloat.

The pandemic has given birth to a variety of ways of operating at minimal costs. The first one is to work remotely to get rid of the lease and utility costs. The second step is to depend on automation and reducing dependency on staff. The entrepreneur can also reduce the advertising budget significantly by opting for digital marketing measures instead of a traditional promotional strategy that costs a lot of money. They can use their goodwill and excellent credit history to get discounts from suppliers and vendors. All of these measures can help in decreasing the expenses.

3. Managing Cash Flow

Cash flow is the lifeline of a business, and no company can survive without its effective management. Most bookkeepers suggest cash flow management by getting funding or a business line of credit to manage the tough periods and avoid a cash crunch. It can be arranged by offering inventory as collateral and getting the required capital. Other cash flow management steps include invoicing immediately and following up with customers for on-time payments.

In addition, the entrepreneur should offer speed payment options to make sure there are no delays. Business owners must pay their bills by the due date to avoid penalties and late payment charges. They must use a business credit card that comes with rewards and discount offers on every purchase. They should consider leasing assets rather than buying to stop a major chunk of finance from getting stuck.

4. Forecasting and Budgeting

Budgeting is an essential part of financial management as it gives direction to the business. It helps in the utilisation of the available funds in a streamlined and practical manner. The entrepreneur can practise a balanced allocation of resources to every department based on the calculations and the projections. Another vital benefit of budgeting is that it aids the business owner in improving profits and reducing unnecessary expenses that eat into the revenue. Also, it assists in gaining the maximum return on investments.

With a planned budget, the business is able to pay for its expenses and achieve its milestones without any financial constraints. It prepares the business for any setbacks and helps in saving for the future. The comparison between the budget and the actuals offers an insight into the performance of the business.

5. Debtors and Creditors

An entrepreneur should have a fair knowledge of debtors and creditors as they can be confusing. Creditors are those entities or individuals who are owed money for a service, loan, or product they offered to the business. These include loans and trade creditors. Loans are usually provided by banks, moneylenders, and financial institutions. Trade creditors are those who provide raw materials or machinery to the business.

On the other hand, debtors are entities or individuals who owe money to the business for a product or service they have received from it. Customers who have not paid for the goods and services delivered by the business are debtors. At any point, the business owner should be aware of the money that is owed to the business and the amount that is owed by the business to maintain the liquidity.

6. Preparing for the Tax Season

The tax season makes a lot of business owners anxious and burdened with the task of accurate reporting and submissions. A small mistake can lead to losses due to the penalties slapped by the ATO. Thus, business owners must hire an accountant or a bookkeeper to help in planning this in advance. They must ensure that all the transactions are duly acknowledged and recorded.

Claiming tax deductions can help in reducing the amount to be paid and help the business save a lot of money. The professional can help in identifying tax concessions and calculating all the taxes without any errors. They assess income tax, capital gains tax, goods and services tax and payroll tax every year. Preparing for it in advance can help in avoiding last-minute chaos and challenges.

Conclusion

Entrepreneurship is a demanding career option that needs basic knowledge of a variety of business functions. Since capital is the most crucial aspect of running a business, it needs the maximum attention. Thus, individuals looking for business opportunities in Australia need to understand the finance basics mentioned above.