9 Financial Management Rules for Small Business Survival

By Consumer Dummies

Gaining a solid understanding of the financial side of a small business is important to its successful management. However, the root source of most business failures isn’t so much based in the numbers but rather what business strategies, market factors, management decisions, and so on occurred that ultimately produced the numbers.

Or, in other words, the financial performance of a company represents a final output or product that is used to measure business management successes and/or failures. This article highlights business management rules that are more intangible in nature yet represent the root of most small business operating problems or challenges.

Remember: Planning counts

Proper planning is essential to the launch, growth, management, and ultimate success of your business. Don’t underestimate the importance of dedicating resources to planning. Having access to sound financial plans structured for different operating scenarios is an absolute must. Planning represents an ongoing and fluid process. The business plan represents a living, breathing tool that is constantly changing as market conditions change. The ability to adapt and remain flexible to changing market conditions has never been more critical than in today’s fiercely competitive global marketplace.

Secure capital

The proper amount, type, and structure of capital must be secured to provide your business with the necessary financial resources to execute its business plan. One of the most common reasons small businesses fail is that they lack adequate capital to not just survive difficult times but, more importantly, to prosper during growth opportunities.

Although having a war chest available to “tap” during down times is important, having the proper amount and type of capital available to support a rapid growth period is even more critical. Raising capital has been, and will continue to be, one of the most critical and time-consuming tasks business owners and managers undertake. Don’t ever underestimate the importance of raising capital.

One of the greatest losses a small business will realize is that of lost opportunity, which has its roots in not being prepared to properly capitalize on market opportunities. The greatest loss a company may ever realize is never accounted for or presented in its financial statements. Rather, missed market and business opportunities lurk in the background, haunting the business owner, manager, or entrepreneur with one simple reminder: “Imagine what I could have achieved!”

Don’t overlook management resources

Identifying and retaining a qualified and experienced management team represents an essential form of capital that is often overlooked but that is just as important as financial capital. Capital comes in many shapes, forms, types, sizes, amounts, and structures and must be proactively managed in order to properly execute a business plan. When operating your business, don’t forget about the “soft” capital. If management isn’t readily available internally, then don’t hesitate to secure properly qualified external professionals to support your business.

Understand the selling cycle

From an accounting perspective, the start of the selling cycle basically begins with a sales order, which then leads to an invoice and eventually payment. The accounting cycle, while relatively easy to define, represents only one element of the entire selling cycle. This cycle starts with conducting proper planning and market research and doesn’t end until the customer’s needs are completely satisfied (to ensure that the customer returns). The length of the complete selling cycle is often much longer than the aspiring entrepreneur wants to believe and represents one of the most common reasons businesses fail. As expectations aren’t met, capital is depleted, and management’s creditability is destroyed.

Understanding the selling cycle goes well beyond selling a product or service and collecting the cash. You can apply the selling cycle to almost any business function, from raising capital to securing management to developing new products. Make sure you apply the concept of the selling cycle to every aspect of your business to ensure that proper plans are developed and capital resources are secured to handle the inevitable bumps in the road that will come.

Don’t fail to communicate

Failure to communicate your company’s financial results, what market factors are influencing your business’s operations, and how your business will respond to the economic conditions present quite often is at the center of a businesses’ ultimate failure. A business must develop proper communication channels and tools to deliver critical financial information and results, whether good or bad, to the appropriate internal and external parties.

The financial and operating results of your business, whether positive or negative, need to be communicated in a proactive and timely fashion to all key parties, both internal and external. Remember, the goal is to distribute reliable information on which all parties can respond and act (to support the company’s business interests).

Quite often, by proactively communicating operating results, even if the results are relatively poor, you gain added creditability with key management team members and external relationships. Delaying, downplaying, or even hiding bad news is a recipe for a disaster.

Practice CART

CART stands for Complete, Accurate, Reliable, and Timely. Your company’s financial and accounting information system needs to produce complete, accurate, reliable, and timely financial information, reports, data, and so on so that management can make informed business decisions. Without CART, a business can’t function properly or make informed and timely business decisions. Information represents the lifeblood of every business and starts with your internal accounting and financial information system.

Having raw transactional data that is accurate and timely is only half the battle. Being able to take this raw transactional data and present it in a reliable format that tells the entire (or complete) story is even more important. CART is a highly interdependent function that starts well before data is ever entered into the accounting system and ends well after the reports are generated.

Remember to KISS

No, no, unpucker your lips. KISS means Keep It Simple, Stupid. Most businesses operate within an economic model that relies on two or three key financial factors or realities that tend to produce significant changes with profits or losses (and the associated impact on cash flows). Identifying, understanding, and managing these key factors often leads to the ultimate success or failure of a business. As such, structuring accounting and financial information systems that capture these factors in easily understood financial projections and supporting reports can greatly help you generate profits and make it to the eventual big payday.

Comply, comply, comply

You must comply with various taxes and tax equivalents, especially given the current economic environment present and need for governmental bodies to raise funds.

Keep in mind four critical concepts:

  • Subchapter S corporations, LLCs, and partnerships are all considered pass-through entities for income taxation purposes. That is, the taxable income or loss of a business is passed through to the owners of the company, who are ultimately responsible for any income tax obligations. A regular C corporation isn’t a pass-through entity, so its income tax obligation resides at the company level.

  • Within a pass-through entity, no dividends are present. Rather, a distribution of earnings may occur, which in itself isn’t a taxable event. A tax obligation is generated when a distribution of taxable income occurs and not from a distribution of earnings.

  • Various taxes, including payroll taxes, sales/use taxes, and certain excise taxes, are held in trust for taxing authorities. If these taxes aren’t properly collected and remitted on a periodic basis, the taxing authorities can pierce the corporate veil and pursue collections against the owners of the business and/or the responsible parties.

  • You can establish nexus, which is when you legally conduct business in another taxing jurisdiction, within another location by executing the simplest of transactions. Once nexus is established, be prepared to proactively comply with numerous taxation requirements; the last thing you want to deal with is “tax and compliance” auditors descending upon your business from every angle.

Know when to say when

In the event that the business as currently operating is no longer economically viable and no market is available to sell the business, a final termination plan should be implemented to liquidate remaining assets. Voluntary liquidations offer the best opportunity for financial returns to be realized, whereas involuntary liquidations (whether orderly or forced) often result in very poor financial results (not to mention the emotional strain that usually accompanies these events).

The emotional strain associated with a business termination is often far greater than the financial strain. Burying a concept that a business owner has put all her heart, soul, and energy into (not to mention money!) is one of the most difficult decisions a business owner will ever have to make. You need to make this decision objectively and efficiently. Retain external professionals to administer the final rites to the business.