Effective financial management is the backbone of every successful business, including those related to the shed industry.
It encompasses essential practices like strategic bookkeeping, accurate projections, and understanding financial statements. Owners and entrepreneurs who want to strengthen their financial foundation and make data-driven decisions that drive sustainable growth use effective financial management techniques.
Will Meikle is a mentor with SCORE Western Connecticut and a former chapter chair. He has over 40 years of business experience in accounting, finance, and operations.
He shared keys to good financial management during the webinar “Mastering Small Business Financial Management— Keys to Growth and Profitability.”
Benefits of Systematic Money Management
What are the benefits of using systematic money management for small business sustainability and growth?
First, Meikle says, it provides you with information so that you can make good decisions about your business.
“Do you understand whether or not you are making a profit for a given period of time, whether that’s a month, quarter, or calendar year?” he asks. “Obviously, you want to be profitable, but that doesn’t just happen. You have to actually keep an eye on things and make sure you take appropriate actions as necessary to make sure you’re improving your profitability over time.”
Second, money management will help forecast growth.
“If you have a good understanding of where your business is, where its profitabilities lie, where there might be areas where you’re not as profitable as you could be, understanding that and helping forecast where you’re going in the future will be very useful,” Meikle shares.
Third, it will help you plan for expanding your markets, expanding new product lines, and diversifying into other segments of the business. Finally, it will help you prepare to acquire additional financing, loans, or even grants.
“A lender, or someone who’s in a position to give you money, they’re going to want to have a conversation with you to make sure you actually understand your financials and can, in fact, pay things back if they were to lend you money,” says Meikle.
Strategic Budgeting
The first place to start is with a budget.
Meikle says a budget is nothing more than a simple understanding of your monthly, quarterly, or yearly expenses and incomes organized by categories.
“It really helps you understand and track all the business expenses that you incur on a routine basis,” he shares. “It will identify those areas where you may be spending more than you need to and where you might be able to cut back.
“It will help you plan for future growth. It will help you decide if you’re in a position where you can expand further, whether that’s more products, more services, or maybe you need another location.
“And lastly, it will help you understand and make the right decisions around becoming a profitable enterprise.”
Bookkeeping
The first step along that journey, according to Meikle, is bookkeeping.
“Most people start businesses because they have a passion or interest level in something that they’re very good at,” he points out. “You started it because you wanted to make money, but you didn’t necessarily want to take on all the responsibilities of doing the bookkeeping and aspects of tracking the financials of your business. But, it’s a very important step that needs to be done.”
Getting Started
“If you are comfortable with technology and software, then I would encourage you to get a business accounting software program,” says Meikle. “One of the first steps that is important is getting some way to organize and track your business expenses on a regular basis.
“If you’re not comfortable with software and you’re not comfortable with tracking these things yourself, this would be a great example of something that you could hire somebody to do for you. There are many bookkeeping firms in every community across the country that you can hire on an hourly basis to do your bookkeeping activities.”
Separate Business and Personal Finances
Then, he recommends opening a separate business checking account, credit card, etc. “It’s really important that you try to keep, as much as possible, your personal life, and your business life separate. It will help you organize all of your income and expenses.”
Pay Business Expenses First
In terms of a disciplined process going forward, Meikle says owners/entrepreneurs should pay business expenses first before paying themselves.
“One of the things that we are all familiar with in our personal life is a credit score,” he says. “You want to make sure that you are establishing a credit score for your business, and that starts with making sure that you pay your bills on time. You don’t have a lot of debt outstanding unless it’s for something very major, like a vehicle or a building or things of that nature, and you take care of those expenses before you pay yourself.”
Review Financial Statements Regularly
Meikle also says it’s important to produce financial statements, such as profit and loss and cash flow, and review them periodically.
“I prefer that people do it monthly,” he recommends. “That may be a lot for you, but at a minimum, you should do at least quarterly. I think it’s important because you can understand those statements if you look at them periodically. If you just do it once a year, you’re going to forget what some of that means, and you’re going to forget where some of those expenses came from.
“You’ll have time to react if you see something that’s not going the way you expected. You will be able to take corrective action. If you wait too long to review these statements and you see something doesn’t look right, it may be that way for a long time, and you may have unexpectedly wasted a lot of money on something you did not intend to do.”
Don’t Forget to Pay Yourself
Finally, pay yourself after you pay your business expenses.
“Make sure you pay yourself because at the end of the day, you started this enterprise so that you could create some income for yourself and your family,” Meikle points out. “So, don’t forget to pay yourself in what is called owner’s draw.”
Financial Statements
There are three basic statements that most businesses should get comfortable with and understand what’s going on, Meikle shares. These are profit and loss (P&L), cash flow, and a balance sheet.
Profit and Loss
“The profit and loss statement is probably the most important report that businesses have, and is the one that most people are most familiar with,” he says. “Simply stated, it measures the revenues and expenses of a business over time to really identify whether you are making a profit or a loss.
“It helps to show how successful you are in buying products and selling products through your enterprise, and it measures how successful your business is. And if you are going for a loan, it shows whether you have enough income and profit and loss to support repaying that loan back is important.”
Cash Flow
A cash-flow statement or projection helps you understand the balance of cash you have on hand after money has been received and paid out.
“And why is that important?” asks Meikle. “Just like in your personal life, and you’ve got to think of it as a checkbook at home, you want to make sure that there’s always going to be enough cash in that account to pay off any bills or liabilities that you have to creditors.
“One of the most troubling things for businesses is to have bills in front of them, but they don’t have enough cash in the bank to pay those bills off. A cash-flow projection will help you predict that ahead of time. For example, you can go to a bank and you can get a line of credit, which is typically the type of loan they will give people to weather the storm of ups and downs, or seasonality patterns that they have in business.”
Balance Sheet
A balance sheet is a snapshot of the liabilities and assets that you have in your business at a point in time. Assets are those things that you own, and liabilities are those things that you owe to others.
Securing Financing
Business financing provides the money you need to start, run, or grow your business. There are two different types of financing that can be provided. One is equity versus debt, and the other is financing working capital versus fixed assets.
Debt vs. Equity
“Debt financing is where you go and you take a loan out and you have to pay that back over some period of time,” Meikle says. “Equity is when someone gives you money in return for a percentage of ownership in your business.
“In the case of debt, obviously, you have to pay that back. You typically don’t have to pay equity back, but you do give up some ownership responsibility of your company and any future profits or losses that you incur are then split with yourself and whoever your equity partner was.”
Working Capital vs. Fixed Assets
Financing working capital is meant to be short-term in nature, typically less than three years. It’s there to help with the ups and downs that have happened in the business.
“As I mentioned earlier, if you have a business that has a seasonality pattern to it, you know you may need some working capital funds to help you weather that storm to get you from one slow period to the high period and then be able to pay that back off again,” Meikle says.
If you finance the purchase of a fixed asset, that usually means buying something that has a long, useful life.
“Typically, the examples most people are familiar with are vehicles you would use in the operation, large pieces of equipment, buildings,” he points out. “Things of that nature are typically fixed assets, and you would buy that through some form of a loan with a bank. That usually has a very long payback period, somewhere between 20 and 30 years.”
Key Factors for Securing a Loan
Meikle says there are several important factors to note when securing business financing.
Invest Your Own Money
“If you foresee the need to acquire a loan to purchase a $50,000 piece of equipment, there’s not a lender in the world that I know of that will give you $50,000 to do that,” he points out. “They typically are going to expect you personally to put in 15 to 20 percent of the value of that purchase, and they’ll lend you the balance.”
Demonstrate Profitability
“You’ll typically be asked to show three years of historical performance of your business, and, typically, a three-to-five-year view of what’s in front of you, in terms of a forecast of what your business will look like so that they can see that there’s a trend here that will allow you sufficient income to pay back that loan,” Meikle says.
Understand Collateral
You also need to understand collateral. There are some lenders who will require collateral to lend you money.
“That means if you’re taking out a loan, the lender will want to make sure that it can attach the loan to something of value,” says Meikle. “That’s so if, God forbid, you are unable to repay that loan, they know that this asset that has been collateralized, as they call it, can be taken by the bank and sold to repay that loan.”
Build Relationships with Lenders
He encourages business owners to shop around for banks and other lending institutions.
“I do highly recommend that you always start with the bank that you are doing business with on a regular basis,” he shares. “They have knowledge of you. They have an understanding of the pattern of income and expenses that come in and out of your account. And if it’s someone you deal with on a fairly regular basis in terms of being in the bank, talking to them, you’ve got a relationship that will help open the door. I really do suggest you start with that.”
Preparing for a Loan
If you’ve decided that you want to go forward and take out a loan for your business, what is it that you’re going to need before you even walk into the bank or lender?
Create a Business Plan
“First off, they are going to want you to have a business plan,” Meikle points out. “A business plan is a narrative description, an outline of your business: what it does, who it serves, what marketing techniques you use to reach new clients, how you are organized, some of the key employees and partnerships that you have in your business with people like accountants and attorneys, etc.”
Know What You Can Afford
“Clearly don’t go in asking for something much more than your financial statements will be able to support, otherwise it’s a fool’s errand,” Meikle points out. “They will turn you down, and you’ll get frustrated.”
Understand Credit and Collateral
Understand your credit report and your credit score, he says. For new businesses, this may have to relate to your personal credit report and score.
Know what your options are in terms of what you have for collateral. What are things that you can, if necessary, have the loan attached to: vehicles, houses, equipment, things of that nature?
Research Financing Options
“There are a lot of banks, a lot of institutions, there are credit unions—there are lots of different organizations out there that lend,” Meikle points out. “Do research on what your options are, what the interest rates are, what the payback terms are, so that you understand which option is best for you.”
