Business Finances
Small businesses play a massive role in the global economy. Research by FinancesOnline shows that 70% of global employment is by small to medium-sized businesses. While there are many factors that contribute to success, healthy financials are the backbone of every successful business.
As a business owner, it’s important to understand your business financials without having to rely on your bookkeeper or accountant. This means:
- Understanding profit and loss statements and balance sheets
- Knowing how to manage your cash flow
- Understanding the business finance options available to you and when you may need them
- Implementing financial risk management strategies
- Understanding business insurance and how it can reduce your financial risk exposure
The purpose of this page is to introduce you to the key areas of business finance and financial risk management. To start with, let’s take a look at what a good financial health looks like for small businesses.
What does a business with good financial health look like?
When a business has good financial health it is usually:
- Generating enough cashflow to meet its accounts payable
- Operating on a strong profit margin
- Consistently working to create accounts receivable
- Chasing accounts receivable for timely payment
- Paying staff in full and on time
- Minimising expenses
- Keeping proper financial records for five years
- Meeting all tax and reporting obligations
A financially healthy business is more likely to receive business loans and attract new partners and business opportunities. Businesses with strong financial records will also be easier to sell down the line. Staying on top of your financial affairs with strong, consistent processes will reduce staff turnover, boost productivity and generate larger profits.
What are business financials?
Understanding the basics of business financials is a must for every business owner. It not only gives you the tools to manage your business better, but it’s essential for growth. Business financials covers a wide range of things, but there are some basic concepts you should understand:
- Balance sheet: This is a statement that shows your business’s financial position at a specific period in time. It details your equity and capital assets (e.g. cash, inventory, equipment, etc) and also your debts/liabilities (e.g. loans, unpaid invoices, money you owe, etc).
- Profit and loss: A profit and loss (P&L) statement outlines how much profit your business makes over a period of time including income, outgoings and expenses.
- Turnover: The total amount you have invoiced to your customers or clients.
- Cost of sales: The total direct costs you have incurred to produce your products or services (excluding indirect costs such as advertising and distribution).
- Gross profit: The profit you made/turnover less the cost of sales.
- Overhead costs: The ongoing expenses to run your business, e.g. electricity bills, wifi, mobile phone contracts, etc.
- Gross profit: The gross profits less overhead costs.
Learn more about small business accounting and key concepts to understand.
Another key part of maintaining your business’s financial health is understanding business finance, when you may need it and how it can support business growth. Most small businesses need to source external finance at some point during the business lifecycle.
What is business finance?
For most entrepreneurs and business owners, dipping into a large pot of savings to fund a new business venture or business growth isn’t a viable option. There are many types of business finance available for different purposes.
When might I need business finance?
Some instances where you may need business finance include:
- Fluctuations in cash flow
- Starting a business
- Buying an existing business
- You need a business vehicle(s)
- Purchasing new equipment, machinery or tools
- Business growth and expansion
- Research and development
What are the sources of finance available to a business?
The main sources of finance available to small businesses include:
- Business loans: Business loans can be taken out with traditional banks or non-traditional lenders. There is the option to take out secured and unsecured business loans.
- Debt financing: Debt financing includes bank loans, credit cards, overdrafts, mortgages and equipment leasing/purchasing.
- Equipment financing: A type of loan used to buy new equipment or update your business’s capital assets.
- Investor funding and capital: Capital raised through private investors, angel investors, venture capitalists, crowdfunding and SME investment companies.
- Business grants: Funding and financial assistance offered by governments and other organisations.
- Trade and invoice finance: A finance solution whereby someone buys your unpaid invoices for a fee.
The right finance option will depend on various factors including the reason for seeking finance, your financial circumstances, credit history, collateral and more.
How much business finance do you need?
One of the key ways to determine the most suitable type of financing is to assess how much capital you actually need. For example, are you a startup, an existing business looking to expand or someone who wants to buy an existing business or franchise?
Startups will need to consider business premises, rental bonds, business registration fees, permits and licensing, shop fits outs and many more other hidden costs that come with starting a new business. Therefore, you may need to source a more substantial amount of cash.
Businesses looking to expand may simply need funding to employ a new cohort of staff or purchase additional equipment to service a wider area, therefore the amount required may be much lower.
Either way, you need to determine how much capital you need and back it up with evidence, e.g. a business plan.
What is the best financing option for a small business?
Here are some questions to help you choose the right financing option:
- What do you need finance for?
- How much capital do you need?
- What is your risk exposure?
- What does my personal and business financial history like?
- Do I need short or long term finance?
- How much will getting finance cost me?
What will be the return on investment (ROI) if I get finance?
As well as sourcing finance for new business ventures and growth, financial risk management is a crucial part of protecting your business and assets from loss in the event of a natural disaster, client incident or other claims.
What is financial risk management?
Risk management touches many areas of a business, but particularly from a financial standpoint. Identifying potential risks and how to manage and mitigate them is necessary to protect not only your business but your livelihood. Below are some of the common financial risks for small businesses:
- Insufficient funding
- Credit risks
- Liquidity
- Operation risk
- Market risk
- Legal risks
One of the most important ways you can protect your business from such risks is with adequate business insurance.
How can business insurance protect my financials?
Insurance is a key component of a healthy business as it protects you from unexpected financial pressures. Trying to salvage a business or pay litigation fees without business insurance can be extortionate, and for many business owners, it could mean having to shut up shop. Business insurance can also protect the financial health of your business, assets and personal income if you experience a business interruption that brings your operations to a halt.
We understand that managing your financials, financing your business and devising risk plans can feel somewhat overwhelming. These are also not things you should deal with lightly as your business and assets could potentially be on the line. At SavvySME, we have a range of financial experts and professionals to assist you including finance brokers, loan brokers, business advisors, business insurance brokers and grants consultants.
As well as connecting you with finance professionals, you can also check out our articles and guides or join in our community discussions with other small business owners.
