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Being a business owner is no walk in the park. In fact, to say it’s a demanding journey – both physically and mentally – is an understatement.
Facing financial challenges is something no business owner desires, but it’s a common reality. Many entrepreneurs invest well beyond the typical 40-hour workweek into their businesses, often with the realization that their hard-earned money is on the line.
Moreover, entrepreneurs bear the full weight of their business’s financial obligations, a responsibility that can be especially challenging in a country with over 1,105,143 registered businesses under the MSME category.
If you find yourself grappling with small business finances, this article offers actionable money management tips to help you improve the financial health of your company.
What is Financial Management?
Financial management is the process of planning, organizing, controlling, and monitoring the financial resources of a business.
It is a crucial aspect of running a successful company since it ensures that the finances are properly managed and utilized to achieve its goals and objectives.
Proper financial management involves creating and following a budget, tracking expenses, monitoring cash flow, managing debt and credit, and making informed financial decisions based on accurate financial data and analysis.
By effectively managing their finances, business owners can minimize financial risks, maximize profitability, and support the long-term sustainability of their company.
Key Financial Statements for Businesses
As a business owner, it is important to understand the key financial statements that are used to monitor the financial health of your company.
In a nutshell, the balance sheet shows a clear picture of your company’s financial condition at a particular time period. It shows the company’s assets, liabilities, and equity.
The assets are what the company owns or has a claim to, while liabilities are the company’s obligations or debts. Equity is the residual interest in the assets of the business after deducting liabilities.
The income statement, also known as the profit and loss statement, is a financial statement that shows the company’s revenue, expenses, and net income or loss over a certain period.
This enables business owners to determine the profitability of their business operations and identify areas where they can reduce expenses or increase revenue.
This integral financial statement helps business owners make informed decisions about pricing, product development, and marketing strategies to increase profitability.
Cash Flow Statement
The cash flow statement details the inflows and outflows of cash in the company over a given period, typically a month, quarter, or year. This shows how much cash is available to pay bills, meet payroll, and reinvest in the business.
By analyzing the cash flow statement, business owners can identify potential cash flow problems and take necessary steps to address them, such as negotiating better payment terms with suppliers or reducing expenses.
Common Challenges in Business Financial Management
We’ve rounded up the most common challenges faced by business owners when it comes to financial management.
As a business owner, you should always remember that the budget must be updated regularly to reflect changes in your business’s financial situation.
Ensuring employees and bills are paid on time
As a business owner, ensuring that your employees are paid on time is crucial not just for the productivity of the company, but also for maintaining a good working relationship with your employees.
Similarly, paying bills on time is necessary to avoid accruing interest and penalties.
Whether it’s for business expansion, equipment purchases, or managing cash flow, obtaining financing can be a daunting task.
This can lead to business owners resorting to high-interest loans or credit cards, which can eventually lead to financial distress.
Maximizing financial products
Unfortunately, many business owners are still not aware of the financial products available to them.
As a result, they may not be taking advantage of options that could benefit their business.
Increasing profit margins and controlling cost
When it comes to financial management, increasing profit margins and controlling costs are two sides of the same coin.
Business owners need to find ways to reduce costs without compromising on the quality of their products or services, while also finding ways to increase revenue.
Contingency planning is an important aspect of financial management that is often overlooked by business owners.
Contingency plans are put in place to prepare for unforeseen events that could impact the financial health of the company, such as natural disasters, economic downturns, or unexpected changes in the market.
Without this, your business will be vulnerable to financial instability during times of crisis.
The process of financial reporting can be complex and time-consuming. Because of this, a lot of entrepreneurs find themselves struggling to keep up with accurate and timely reporting.
Recommended Reading: Bookkeeping Guide for Small Businesses in the Philippines
This can lead to errors in financial statements, which can have serious consequences for the business.
Important KPIs and Metrics for Financial Management
Here are some important key performance indicators (KPIs) and metrics to track for effective financial management.
This helps you see your overall profit or loss during a certain period.
Gross profit margin: total sales – COGS (or cost of sales) / total sales x 100
This indicates your company is using its assets efficiently to generate profit.
Operating profit margin: operating income/revenue
This helps you see better management and cost controls in your business.
Net Profit Margin: net profit/sales x 100
When you have a high net profit margin, it shows that your company is turning sales into profit.
Efficiency refers to how well your business uses its assets and capital to generate revenue.
Return on assets: net income / average value of assets x 100
This allows you to know how your company converts money invested in assets into profits. Compare it against others in the same industry as yours.
Working capital ratio: current assets / current liabilities
This is a measure of liquidity and it shows your ability to pay short-term liabilities.
Working capital turnover: net annual sales / average amount of working capital for the same year
Compare it against the same companies as yours to see how well you’re using your capital to get sales.
This is your business’s ability to pay off long-term debts.
Operating cash flow ratio:
net income + non-cash expenses + changes in working capital / current liabilities
If the result is 2, it means your business earns PHP 2 for every peso of liability. Another way to explain this is that your company can cover its liabilities twice over.
12 Practical Finance Tips for Filipino Small Business Owners
Having a solid understanding of financial management is crucial for any small business owner. Take a look at these tips to help you manage your business better.
1. Pay Yourself
As a small business owner, it can be tempting to pour all of your profits back into the business in an effort to grow and expand.
However, don’t forget to pay yourself a fair salary. This not only helps you cover your personal expenses, but it also helps you maintain a healthy work-life balance.
Separate personal and business
Confusion between personal and business finances can lead to serious financial mismanagement. Have separate bank accounts for personal and business finances.
This will help you track business expenses accurately and ensure that personal and business expenses are not mixed.
2. Budgeting and Forecasting
Just like in your day-to-day life, creating a budget is also key to your business because it allows you to plan and allocate your financial resources effectively.
By forecasting your revenue and expenses, you can identify potential financial challenges and adjust your budget accordingly.
A well-prepared budget also helps you stay on track and make informed decisions about new investments or business initiatives.
How to accurately forecast your budget
To accurately forecast your finances, you first need to have a clear understanding of your business’s historical financial performance, as well as current market trends and potential risks.
This involves analyzing your financial statements and conducting market research to identify opportunities and threats that could impact your business.
Adapting to the business environment: seasonality, holidays, and local events
In the Philippines, seasonality can greatly affect the revenue of businesses in certain industries.
For instance, during the holiday season, there may be an increase in sales in businesses like hotels and resorts, while there may be a decrease in sales for agricultural businesses due to the rainy season.
Know day-to-day costs
These costs include expenses such as rent, utilities, salaries, and inventory.
By tracking these expenses, you can identify areas where you may be overspending and make adjustments to your budget accordingly.
It also helps you to ensure that you have enough cash on hand to cover your daily expenses and avoid cash flow problems.
3. Managing Cash Flow
A lot of business owners ask why cash flow management is so important. It’s because cash flow is the lifeline of any business. Without proper cash flow management, your business will surely struggle to pay bills, meet payroll, and fund day-to-day operations.
Monitor your cash flow regularly
Record all incoming and outgoing cash flows daily to get a clear picture of your business’s financial health.
Implement a cash flow forecast
By forecasting your cash flow, you can anticipate potential shortfalls and plan for them accordingly.
Manage your accounts receivable
Follow up on unpaid invoices and implement a system for collecting payments on time.
Practice timely invoicing
Set up a system for sending invoices promptly and follow up on any overdue payments. This way, your company will receive the cash it needs to operate smoothly.
Manage inventory properly
Overstocking can lead to excess expenses, while understocking can lead to lost sales and dissatisfied customers.
Regularly review your expenses and identify items that are not essential to the operation of your business. Cutting down on non-essential expenses can help you save money.
Additionally, building a good relationship with your suppliers can also help you negotiate better pricing for the supplies and services you need.
Have an emergency fund
Filipinos are known for our resilience in the face of adversity, and that same resilience should be applied to your small business.
It goes without saying that unexpected expenses can arise at any time. Having an emergency fund set aside can help your business get through tough times without having to rely on loans or credit.
By setting aside a portion of your profits each month, you can build up a cushion that can help you weather any financial storm that comes your way.
How are you recording and organizing your financial transactions?
Keeping accurate and up-to-date books is essential for making informed financial decisions and maintaining compliance with tax regulations.
Consider using accounting software or hiring a bookkeeper to ensure that your books are in order. More on this later.
Focus on expenditures and ROI
This involves analyzing the cost of every investment made and evaluating its impact on the business’s revenue. By tracking ROI, you can determine which investments are worth continuing and which ones need to be discontinued.
For instance, if you invest in marketing, track how much revenue it generates. You can use tools like Google Analytics to assess the effectiveness of different marketing channels and campaigns.
By analyzing ROI, you can adjust your marketing strategy and allocate your budget towards the channels that generate the most revenue.
Cut costs and increase revenue
This involves identifying areas in your business where you can reduce expenses and find ways to attract more customers and generate more sales.
For example, look for ways to reduce your overhead expenses, such as renegotiating your lease, switching to a more affordable supplier, or downsizing your office space.
4. Billing Strategies
Billing clients is always a delicate process. However, it is your job to make sure you are compensated for your effort without causing any friction in your business relationships.
- Set clear payment terms: Make sure your clients understand when payment is due and any penalties for late payments.
- Automate your billing process: This ensures that invoices are sent promptly and accurately.
- Offer a variety of payment methods: Make it easy for clients to pay you.
5. Manage Inventory and Control Stock
Keep track of stock levels and reorder products when necessary.
This can be done through the use of inventory management software, which can track stock levels and generate reorder alerts when the stock falls below a certain level.
It’s also important to have a clear understanding of your lead times which is the time it takes to receive new stock so that you can place orders in advance and avoid your products going out of stock.
6. Debt management
Borrowing surely has advantages, but it can also lead you down a dangerous path of debt if not managed properly.
While it can help you expand your business, too much debt can put a strain on your cash flow.
Choose the right financing option
Look for loans or lines of credit with favorable interest rates and repayment terms that match your business’s cash flow.
Explore cooperatives, banks, and other financial institutions to find the best options for your business.
It’s also important to have a solid plan for paying off any debts, including setting aside a portion of your profits each month for debt repayment.
Effectively manage debt
Keeping a good business credit means you will have access to more funding opportunities in the future.
To manage your debt effectively, prioritize high-interest debts and stay on top of deadlines.
Furthermore, make minimum payments on all debts to avoid late fees and penalties.
7. Cash Reserves
A cash reserve is a holding of liquid assets set aside for unexpected expenses or opportunities.
This reserve can include cash, short-term investments, and other highly liquid assets that can be quickly accessed in times of need.
Maintaining a cash reserve can help your business avoid the need to take on debt or sell assets in order to cover unexpected expenses.
It can also give you flexibility to take advantage of opportunities as they arise.
8. Tax Planning and Compliance
The Philippine Tax System can be complex and confusing, but it’s crucial to stay compliant to avoid penalties and legal issues.
Understand the Philippine tax system, especially your tax obligations
Business owners should be away from their tax obligations such as corporate income tax, value-added tax (VAT), and withholding taxes.
Strategies for effective tax planning
Perhaps the best tip to ensure you don’t get stressed by tax issues is to consider working with a professional accountant or tax consultant.
This professional can provide guidance on tax planning strategies so your business stays in compliance with all tax regulations.
If you cannot afford professional services, take the time to educate yourself on the tax laws that are applicable to your business.
9. Investing in Business Growth
While it’s tempting to keep all your profits and earnings as cash reserves, investing in business growth can be a smart long-term strategy.
Reinvest profits and evaluate business opportunities
Assess the investments available to you – marketing, developing new products, employee training, and infrastructure upgrades – and determine which areas will generate the most return on investment in the long run.
For example, diversifying your product offerings can increase your customer base and revenue streams.
10. Protect Assets and Planning for the Future
Without proper protection in place for your business, it may easily crumble when you face challenges.
Consider getting insurance
Obtaining insurance coverage for property damage, liability, and business interruption can protect your business from unforeseen events.
Retirement and succession planning
Do not skip planning for the future by thinking about your retirement and succession planning.
While it may seem far off, have a plan in place for who will take over the business when you retire or in case of an unexpected event.
This can involve finding a successor, developing a plan for handing over control and preparing legal documents such as a will or trust.
If not, this can cause disputes over family members and assets, leading to a potential downfall of the business.
Protect your IP
In addition, protect your business’s intellectual property by obtaining patents, trademarks, and copyrights.
This can safeguard your brand and prevent others from stealing your ideas or products.
11. Leveraging Technology for Financial Management
Without leveraging technology, financial management can be a time-consuming and error-prone process.
Fortunately, there are many software solutions available that can streamline financial management and provide valuable insights into your business’s financial health.
Utilize fintech solutions
Consider investing in accounting software that can automate tasks such as invoicing, payroll, and financial reporting.
This can save you time and reduce the risk of errors.
Offer digital payment and e-commerce
Prioritize digital payments and e-commerce to keep up with the modern business landscape.
Offer online payment options and utilize e-commerce platforms to expand your customer base and streamline transactions.
12. Continuous Learning and Seeking Experience
Change is inevitable in the business world.
Staying up to date with industry trends and advancements in technology through courses, workshops, and conferences can help you stay ahead of the curve.
Business owners like you must seek out experiences that will challenge and broaden your skillset.
Consider taking on new projects, collaborating with other businesses, or even traveling to gain new perspectives and insights.
Seek the help of professionals
If you feel like you’ve hit a plateau in your business, it may be time to seek out a mentor or business coach.
This individual can provide you much-needed guidance and support as you navigate new challenges and opportunities.
Utilize local resources and workshops for financial education
Finally, take advantage of local resources and workshops to learn from other business owners and gain valuable insights on best practices and strategies.
This can also give you networking opportunities with like-minded individuals.