Managing Business Finances

82% of businesses fail because of mismanaged finances. This statistic can be daunting to aspiring business owners, but don’t get discouraged. There are clear steps that you can take when starting a business to set you up for long-term success, including:

• Understanding cash flow
• Starting out with enough money
• Creating a business plan
• Researching proper pricing
• Being aware of what you can do and what you need help with

Another way that you can increase your odds of success is to join the business community as a franchisee. Franchising offers a variety of advantages, ranging from selling under an established brand to operating with a battle-tested business model.

If you open a franchise or embark on the long road of entrepreneurship, you’ll need to know how to manage your business’s finances. That’s why we’ve put together this comprehensive guide on financial management—to give you the information you need to succeed and to get you excited about taking control of your life and owning your own business.

What Are the Main Elements for Financial Management?

Comprehensive financial management that sets you up for long-term success includes planning, controlling, organizing, and making data-backed decisions. We’ll conduct a deep dive on each of these points below.

Planning

To effectively manage your business’s financial health, you need a goal. Are you working to expand your business or maximize profit? Depending on what you hope to accomplish, you’ll need to take steps toward your specific goal. For example, if you are planning to build an extension on your business or open a new location, you’ll dedicate a large portion of your financial management resources toward securing financing. If your goal is to maximize profits, then you’ll need to conduct customer research to see how you can either sell to more customers in a day, sell more to each customer, or both. Franchisees can benefit from the support of their parent company during this process.

Controlling and Organizing

With a goal set, you then need to make sure each aspect of your business is working to achieve it. Team leaders, employees, budget allocation… even pieces of equipment all play a vital role. For example, if your goal is to sell more cones from your Bruster’s Real Ice Cream franchise, you’ll need:

• Your social media manager to post about your deals and show off a delicious double-scoop on a hot day.
• Your shift managers to schedule more employees during peak times.
• Your employees to promote your punch-card rewards program.
• To allocate more of your budget toward ingredients to meet growing demand.
• And to ensure your equipment can handle dispensing enough soft-serve to help customers beat the heat!

It’s also important to determine metrics to see how each part of your business is performing. That way you know which of your efforts are driving improvements and which are wasting your time and resources. Continuing with our tasty example, the most important metric is how many customers are buying from you each day. You’ll also want to track what their average spend is. These two metrics can tell you if your efforts are increasing your profits. You should also measure how each of your controlling methods are performing. For the tasks above, you would want to know:

• Are people engaging with your social media posts?
• Are you short-staffed with frustrated employees and customers that are stuck waiting?
• How many customers took a punch card and how many returned to use it?
• Have you ever run out of certain items on your menu, like coveted rainbow sprinkles?
• Has any of your equipment stopped working or is no longer consistent?

These steps are necessary to make sure your finances are supporting useful endeavors.

Decision Making

You have your data, now it’s time to do something with it. This might include hiring new employees or investing in more equipment. To make the best use of your finances, start with what your business can’t function without. For example, you need to have a certain number of employees to serve customers, accept ingredient deliveries, and keep your business clean. Then, you can focus on what will bring you closer to your goals, like investing in paid social media ads to boost the reach of your posts.

At the end of the day, your finances are only as good as what you do with them. Form a plan, allocate resources, measure results, then adjust and improve as you move forward.

How Do Small Businesses Organize Their Finances?

How to manage small business finances is a combination of keeping and organizing financial statements, filing under the proper legal structure, and tracking your cash flow and budgets. In this section, we’ll take a look at what you need to know to keep your business profitable and operating in line with the Internal Revenue Service (IRS).

What Financial Records Are Needed To Manage a Small Business?

Small businesses are required to keep financial records like bank statements and business expenses so they get taxed appropriately. Here’s a list of mandatory records and what information they provide:

• Financial Statements: In order to receive tax deductions for business expenses, you need to prove that you are operating a business—not a hobby. This means that you need to be earning a profit or expecting to turn a profit soon. The IRS classifies an endeavor as a business if it has made a profit in at least three of the past five years. Keep records of your financial statements for long enough to prove that you are a profitable business (at least three years).
• Invoices (Payable and Receivable): These records compare your operating expenses against your revenue to determine your taxable income. It’s usually recommended to keep invoices for at least seven years.
• Business Expenses: Any money that you spend on your business reduces your taxable income. This includes supplies for your home office, gas and mileage expenses, and advertising costs. Hold onto receipts or other proof of purchase for all of these items.
• Tax Returns: In the case of an audit or just to give your accountant a better picture of your financial history, you should keep your tax returns for at least three years.

Tax laws vary state by state. Consult a financial professional for the latest tax code.

How Do You Manage Personal and Business Finance?

Keeping your business and personal finances separate makes them easier to track and offers you legal protection. To ensure you are paying the right amount of taxes and you aren’t personally liable for your business’s operations, you’ll have to choose one of the following legal structures:

• Sole Proprietorship
• Partnership
• Corporation
• S Corporation
• Limited Liability Corporation

Financial and legal ramifications will vary greatly depending on the route you choose. If you’re unsure which option is right for you, consult a business attorney to discuss the ins and outs of each type of business ownership.

Can I Use Excel for Small Business Accounting?

Microsoft Excel is the go-to financial management tool for the majority of small businesses. In 2019, 59% of businesses that generated less than $25 million in revenue reported using Excel. What makes Excel such a widely used financial management system for a small business? It starts with the ability to embed formulas in your spreadsheets so you can easily determine your financial standing. Here are a few of the spreadsheets you can create and the key financial metrics they track:

• General Ledger: Wondering how to track income for a small business? Record your revenue and expenses to see how much money you have available at any given time. Is your cash flow positive or negative? By tracking business expenses for taxes, you can also reduce your taxable income to match your profit instead of your gross income.
• Annual Budget: Keep an eye on the big picture with an annual budget spreadsheet. This will help you allocate funds at a steadier rate, so you don’t spend too much early on and then struggle to cover unexpected costs at the end of the year.
• Projections: Plan ahead for busy periods or lulls by making projections based on existing data. Will you need to add new members to your team, or should you reduce how much perishable stock you keep on hand? The data can help you decide.
• Project Budget: This spreadsheet helps you allocate enough money to fund a specific project. You may be planning to expand your storefront, add a new product line or overhauling your menu, or update your team uniforms. For example, you might save to replace any worn out Mosquito Hunters gear so your team can deliver even better results (aka less pesky mosquitoes)!

How To Manage a Business Successfully

Whether going at it alone or bringing your business-savvy to an established brand, there are certain elements you can’t do without. For more insight, take a look at our essential list of 3 things that make a business successful:

1. Managing Your Finances: The importance of financial management in a small business can’t be overstated. Whether on your own or part of an established franchise, making all the money in the world won’t get you very far if you lose it just as quickly. For franchisees, you start with a portion of your financial planning done. Marketing, uniform, and software costs are already included in many franchising agreements.
2. Providing a Quality Product or Service: If you don’t sell something people want, then all the management skills in the world won’t bring customers through your doors. Entrepreneurs face the challenge of developing a new offering that meets the demand of their market. Franchisees take a product or service that is proven to work and bring it to a new market.
3. Connecting with Customers: With a brilliant offering, you still need to tell people about it and why they should pay you for it. When starting from scratch, you have the monumental task of developing and testing your own marketing plan and materials. Franchises come with an established brand and marketing strategy to help you hit the ground running. For example, if you were to open an Ace Hardware store, people in your community would already recognize your business as “The Helpful Place.”

What Are 3 Things Small Businesses Can Do To Survive Hard Times?

Even with the most proactive financial management, you can’t control everything. Economic downturns and natural disasters can be detrimental to your business if you don’t know how to respond. Here are a few ways you can stay afloat:

1. Keep Marketing: When times are tough, it can be tempting to save money by slashing your marketing budget. However, that will only make it harder for your business to recover alongside the economy. In fact, businesses that increased their marketing budget during the 2008 recession saw a significant growth in profits. Think about it like this—many marketing methods cost you based on how many competitors you’re up against. When everyone else is cutting their marketing spend, you can expand your reach with less investment.
2. Prepare for Weather Emergencies: Can your business operate when part of your building loses power? At what point do you close due to weather? How quickly can you reopen when conditions are safe again? For an example of how to handle weather emergencies, look no further than Waffle House. This franchise is so good at adapting to disasters that they are even used as an unofficial disaster metric.
3. Recover with an SBA Loan: The Small Business Association (SBA) offers loans to help businesses recover from declared disasters. These loans can cover repairs for physical damage, operational expenses that you would’ve met under normal circumstances, and more!

What Is the Best Way To Manage Your Finances? Invest in What Works with Franchise Gator!

As a business owner, your primary responsibility is managing your business’s financial health. One of the best ways to set yourself up for success is to start with something that works. Here are a few ways that franchising helps you achieve your goals without the stress of starting a business from scratch:

• Operating with a tried-and-true business model
• Corporate training that helps you hit the ground running
• Providing a product or service that has sold well at other locations
• Promoting yourself with an established brand

Interested in a turn-key solution to financial freedom? We thought so. Browse our selection of available franchises at Franchise Gator. Sort by location, industry, and starting investment to find the best fit for you!