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Financial management of a craft microbusiness
Whatever the size of the company, sound financial management is the cornerstone of all successful enterprises. Even successful and possibly profitable businesses will collapse without it. You, as a craft entrepreneur, should know how to manage and track small business cashflow and implement financial planning and forecasting.
The amount of money that flows into and leaves your business during a certain time period is known as cashflow. If you want to stay in business, you must have “positive cashflow”, which is when you get paid more than you spend. If your company has sufficient cash flow, it will be able to pay its debts on time and cover any unforeseen expenses. There could be times when you have “negative cashflow”, for instance, if you purchase a new piece of equipment if a customer’s payment is past due. To compensate for this cash flow shortage, you could have to rely on a bank overdraft or short-term loan. But as long as the negative cashflow has been anticipated and your company returns to a position of positive cashflow, it shouldn’t pose a significant issue for your small business. Typically, cash flow is monitored throughout a predetermined reporting period, such as a month, quarter, or year.
What can you do, then, to prevent your company from going bankrupt and failing?
Correct! Making a cashflow statement and projection is the greatest method to keep a close check on how much money is coming into and going out of your company. You may compare your projected monthly cashflow with your actual monthly cashflow using these very basic financial records. These days, a cash flow statement ought to be one of the regular reports in your accounting software. If not, you may easily construct these documents on your own without any prior accounting knowledge if necessary.
Choosing adequate payment terms is a crucial step in managing the cash flow issue for your small business. Many companies that sell directly to consumers accept payment right away. On the other hand, extending credit to clients and customers may be a successful strategy for generating new business and fostering trust, but it will also have an immediate effect on your cash flow. There is also the ongoing issue of late payments to consider. It is important to consider how you can encourage your clients to make on-time payments because late payments are a major source of cash flow issues.
Small businesses must be picky about who they hire and run a credit check on potential clients before agreeing to deal with them. It takes a strong will to reject prospective new contracts based on a credit check but doing so can be the best thing for your company. Assuming a prospective client has a great credit history and you’re willing to provide your products or services, the next step is to make sure they are aware of the conditions under which you are willing to conduct business. Although you could first agree on your payment terms verbally, you should make sure that verbal agreements are followed by written agreements that are absolutely clear on the terms of payment.
Building relationships with those who will be making the payment is always good since it lowers the possibility of payment delays. Delays may be minimized by making sure the invoice was delivered to the appropriate location and has all the relevant information. It’s also a good idea to inquire about potential delays in payment before submitting the invoice because most individuals will make every effort to keep their promise.
In any small business, financial documents are essential. They may be used for a variety of things, including internal revenue and spending tracking and demonstrating your company’s viability to investors and lenders. Keeping up with your financial planning and forecasts can also help you see possible problems before they happen and provide you the information you need to decide how to run the company. There are four main financial planning and forecasting documents that every small business owner should produce and regularly maintain. Those documents are:
- Balance sheet: A balance sheet provides you with a current picture of your company’s financial situation at any given time. There are three components to a balance sheet: assets, liabilities, and equity. The net worth of your company can always be determined using these three pieces of financial data. A positive balance on the balance sheet indicates that your small business is based on sound financial principles. The balance sheet also provides a clear picture of the business’s financing to outside parties like the bank and potential investors. Liabilities will be worth more if you lack the capital to participate in the company yourself (equity).
- Profit and loss statement: The business’s annual revenue and costs are summarized in a profit and loss statement. You may determine your net profit or loss for the time period using those numbers. Your ability to track your profitability over time and, more importantly, identify your breakeven point (the amount of revenue needed to cover all operating costs) depend on maintaining an accurate profit and loss statement.
- Cashflow statement: A cashflow statement shows how much money comes in and goes out of your company’s operations over a given time period, usually a month or a quarter. It enables you to ensure that there is enough money in the company to run it successfully on a daily basis and to take action before issues arise.
- Breakeven analysis: The number of units you must sell or the amount of revenue you must generate are determined using a breakeven analysis. It’s common for small businesses to experience losses in their early years of operation. On the other hand, if a company fails to break even over a longer period of time, it may not be financially sustainable. By calculating the breakeven point, you may assess a possible business expansion or new project and determine if your pricing is too high or your expenses are too low.