Running a small business isn’t easy—and the current state of the economy isn’t making it any simpler. Inflation, higher interest rates, and limited access to financing means more businesses must make do with their financial situation.
But here’s the good news: Despite the market downturn, the success of your business is still up to you. So, to help you prepare for whatever the market brings, we’ll walk you through some common financial mistakes to avoid and share some tips to optimize your small business finances for the months ahead.
The unique challenges of managing small business finances
Small businesses have much fewer assets, resources, and financing options to rely on than larger businesses and corporations, and their margins and financial runways are often much smaller too. So, it makes sense that they’ll need different financial management strategies to be successful too.
Small businesses must be more strategic with how they spend and allocate funds to avoid cash flow problems. One big mistake or unexpected event can put the entire viability of the business at stake. This is especially important in the current market, as businesses with little credit history or collateral will have difficulty getting the funding needed to maintain their operations.
Additionally, larger businesses have in-house accountants and finance professionals dedicated to managing the company’s funds. In comparison, small business owners—who generally don’t have any finance expertise of their own—often must add accounting and financial management tasks to their already extensive to-do lists, so they have much less time to dedicate to the company’s finances.
Common financial mistakes to avoid for startups and small businesses
Being overly optimistic about your financial future
It takes time to build a stable and profitable business—and thanks to the inevitable obstacles and unexpected detours, it’ll take longer than you think.
Be careful with making plans that revolve around certain milestones in your business, especially in today’s turbulent economy. For instance, if you don‘t have an emergency fund, it’s not practical to quit your day job immediately after making your first sale.
Instead, base your decisions on your current business needs and financial data—then add in a buffer for good measure.
Not taking out business insurance
When disaster strikes, you want to be prepared for it. That’s where business insurance comes in. Depending on the type of business you own, you’ll want to consider purchasing a number of policies, including:
- General liability insurance
- Business interruption insurance
- Professional liability insurance
- Commercial property insurance
- Workers’ compensation insurance
- Data breach insurance
Don’t just settle for the cheapest policy available, either. A policy with the right amount of coverage can save you time, money, and stress if or when the worst happens.
Not hiring a good accountant
If you’re hiring the best of the best to manage other aspects of your business, why wouldn’t you do the same for your company’s finances? Hiring an expert accountant won’t just save you time and effort—they’ll also find ways to reduce operational costs and keep you out of trouble with tax authorities.
If you don’t know where to start your search, ask for referrals from other business owners in your industry or sector.
You may also find it helpful to search through directories offered by financial software providers like QuickBooks or Gusto. These companies partner with financial professionals that use their software and offer them training and additional resources so they stay up-to-date with the platform. So, if your financial software vendor has a directory of their own, consider using it to find a professional who’s already up-to-speed on the platform.
6 small business financial tips to cut costs and increase profits in an economic downturn
1. Invest in your company
It’s tempting to take all your business profits as take-home income, especially after a particularly good month. However, this short-term thinking only offers short-term benefits. It’s much more beneficial to reinvest some of that money into your business instead.
By giving your company the resources it needs to grow, you’ll see your investments multiply in the long run. Investing in your business shows your customers and employees that you care about them, and can make them even more supportive and loyal to you. Making efforts to improve your business also increases its value, which is helpful if you plan on selling the company later on.
Consider supporting your existing team by hiring more people in a department that’s always working at maximum capacity, or by buying software that makes their jobs easier (more on this later). If you’re interested in further ramping up revenue, perhaps you can add another salesperson or increase your marketing budget.
2. Build up your business credit history
As your company grows, you may find yourself in need of small business loans or other forms of financing. But without a strong credit history, lenders will reject your applications or subject your company to unattractive payment terms when you need the money most.
Make sure you’re prepared when the time comes by building up your business credit now. An easy way to do so is by applying for a small business credit card or line of credit and paying it in full every month.
But if you’d rather avoid taking out a credit card you don’t really need, consider opening accounts with net-30 vendors instead. These companies give you 30 days after a purchase to pay your bill, after which they report your payments to business credit agencies—in turn building up your credit profile.
Of course, you’ll only want to buy what you can afford to pay for in full, as on-time payments are the most important factor in building your credit score.
3. Be mindful of tax deductions
If you don’t take advantage of the many business deductions available to you, you’re essentially leaving free money on the table. Small businesses qualify for a variety of tax write-offs, including:
- Advertising and promotions
- Business insurance
- Business meals
- Home office expenses
- Legal and professional fees
- Training and education
- Travel expenses
During your next financial planning session, ask your accountant or tax preparer what you can write off on taxes and discuss strategies to maximize your deductions for the current tax year. Don’t forget to make note of and save receipts for each qualifying business expense—this ensures that, if you’re audited by the IRS, you’re still able to keep those deductions.
4. Create expense policies
An expense policy sets expectations for your employees on what they can purchase and get reimbursed for. It’s your first line of defense against out-of-policy spending, and ensures that no one at your company can change spending guidelines at a whim.
If you don’t have one yet, use this article on how to create an expense policy as a guideline for your own. Make sure to update it every few years so it’s up-to-date with the latest changes in your company.
5. Cut unnecessary expenses
When cutting costs, today’s business owners might decide to end the lease on their office or dial down on advertising. However, there are other hidden ways your company might be losing money too.
Zombie spend, for instance, refers to charges that are continuously made to a company but have been forgotten by employees. Imagine a marketing software subscription that’s purchased and used by only one team member. If the employee leaves the organization without canceling the subscription, the company will continue to pay for it month after month until the expense is discovered.
Maverick spend, on the other hand, refers to transactions that don’t follow the company’s expense policy. These purchases often lead to overspending, breakdowns in vendor relationships, and operational roadblocks that take time and effort to sort out.
It’s important to catch these transactions as soon as possible before they wreak havoc on your company’s finances. Avoid these unexpected expenses with regular audits of employee purchases (or by enlisting spend management software to monitor them on your behalf).
6. Use financial software to streamline operations
Excel may have worked well for you up to this point, but it’s time for an upgrade. With so many tools available to support your finance operations, there's no need to continue using a manual expense management system or budgeting spreadsheet.
Conduct an audit of your team’s time to see where they’re bogged down by tedious tasks, then find an appropriate software to automate them. Look for accounting software for small businesses and other tools that integrate with your tech stack and automate time-consuming processes like pulling expenses, organizing receipts, and running payroll.
Not only will these features save you time and money upfront, they’ll also give you better insights into your financial health so you can make smarter decisions for your business.
How Ramp helps startups, entrepreneurs, and small businesses optimize their finances
Reduce spend, take control of your finances, and boost your team’s efficiency and productivity with Ramp’s finance automation tools.
Set up your expense policy on the platform to monitor and control spend across your organization. By defining spend guidelines, submission requests, and approval workflows, our software helps you catch out-of-policy purchases before they happen.
Together, Ramp’s corporate cards and spend controls give employees the autonomy to make purchases on behalf of the company while automatically enforcing your spending limits. Set flags and alerts for certain kinds of transactions so you can keep a close eye on how money is spent, then lock cards after employees leave your company to prevent zombie spend from hurting your profits.
And because Ramp pulls expenses and financial data from your corporate cards and software integrations, you can easily filter and search through transactions to identify areas to cut costs and save even more money.
With these features and more at your fingertips, it’s no wonder that companies save 3.3% a year on average with Ramp. To learn how our platform can streamline your finance operations and save your company money, take a tour of our software today.