Five Financial Pillars for Building a Robust Small Business

Five Financial Pillars for Building a Robust Small Business

The resurgence of small businesses is crucial for economic recovery. Prior to the pandemic, enterprises with fewer than 499 employees constituted almost half of the private-sector workforce. According to the U.S. Small Business Administration Office of Advocacy’s 2018 SMB Profile, these companies contributed 44% of the U.S. economic activity.

The pandemic severely impacted many small businesses, forcing them to rebuild stronger than ever. Others experienced a surge in demand for their products and services. Regardless of their situation, all small businesses—from emerging startups to established firms with decades of experience—require adequate financial resources to continue serving their customers, paying their employees, and thriving as vital parts of their communities.

This article is not a list of the current challenges such as liquidity issues or neglecting necessary reporting. Instead, it focuses on essential financial strategies that small businesses must adopt to tackle these and other obstacles effectively.

Five Crucial Financial Pillars for Small Businesses

Small businesses can significantly enhance their cash reserves by employing smart financing and tax strategies, providing the essential funds needed for investment and growth.

However, the first critical step is gaining a clear understanding of their financial outflows. Knowing precisely where the money is going is paramount for making informed financial decisions and optimizing resource allocation.

1. Cash Flow Management: A Vital Financial Pillar for Small Businesses

Effective cash flow management is a persistent challenge for small businesses. According to the September U.S. Census Bureau Small Business Pulse Survey, only 28% of businesses surveyed had sufficient cash reserves to operate for three months. Similarly, in the Brainyard Fall 2020 State of the CFO Role survey, cash flow issues ranked high among challenges for companies with 150 or fewer employees.

To bridge cash flow gaps, many small-business owners resort to using personal funds. The Federal Reserve Small Business Credit Survey revealed that over half of respondents relied on personal savings or financial support from family and friends in the past five years. Additionally, when seeking external financing, 88% of these owners used their personal credit scores to secure loans.

Several factors contribute to cash flow problems, including inconsistent revenue for seasonal businesses, inadequate accounts receivable systems, and difficulties in expense forecasting and fund allocation. To address these issues, the SBA recommends tightly managing inventory to prevent capital from being tied up in unused goods or raw materials. Effective inventory management not only improves cash flow but also ensures quick fulfillment of customer orders and reduces unsold stock.

Keeping cash flow analysis up-to-date and projecting forecasts at least three months ahead are essential practices. Offering multiple payment options can enhance customer convenience, while strategies like upselling and cross-selling can increase revenue per customer.

Automating accounting processes can significantly improve cash flow management. Automation ensures accurate projections, timely and precise invoicing, and faster accounts receivable collection. It also enables businesses to take advantage of early payment discounts and negotiate better payment terms with suppliers, thus retaining more cash on hand.

According to Robert Half’s 2019 Benchmarking Survey, about 39% of firms with less than $499 million in revenue utilize financial software. The most commonly automated functions include invoicing, financial report generation, data collection, document storage, and compliance. By leveraging automation, small businesses can streamline operations, enhance financial accuracy, and ultimately boost cash flow.

2. Proactive Tax Management: Essential Financial Pillar for Small Business Success

Tax management is a perennial and time-consuming challenge for small businesses. A survey by the National Small Business Association (NSBA) revealed that one-third of businesses spend over $500 monthly on payroll services to handle deductions, including local, state, and federal income taxes.

Furthermore, another one-third of small businesses dedicate more than 40 hours annually to managing federal taxes alone. A significant majority—63%—spend over $1,000 each year on federal tax obligations.

The complexity and frequent changes in tax codes add to the burden faced by small-business owners. For instance, the Tax Cuts and Jobs Act introduced provisions allowing cash-basis accounting, meaning taxes are paid only on income received, which can simplify tax management for some businesses.

Given these challenges, it is not surprising that 68% of NSBA respondents hire external tax practitioners or accountants to prepare their taxes. This strategy is wise as professional accountants can ensure compliance with changing tax regulations and help businesses maximize tax credits and deductions to reduce their tax bills.

To minimize tax liabilities, small businesses should adopt several best practices:

  1. Choosing the Right Business Structure: Selecting the appropriate legal structure for your business, such as an LLC, S-Corp, or C-Corp, can have significant tax implications and benefits.
  2. Staying Updated with Tax Changes: Being aware of changes under the Tax Cuts and Jobs Act is crucial. For example, some previously deductible expenses may no longer qualify, impacting your tax strategy.
  3. Understanding Remote Work Tax Implications: If your company allows employees to work from home, it’s essential to understand the tax implications. This includes nexus, sales and use taxes, tangible personal property taxes, and potential credits and incentives.
  4. Leveraging Tax Software and Automation: Utilizing tax software can streamline the process, reduce errors, and ensure timely compliance with tax deadlines.
  5. Seeking Professional Advice: Regular consultations with tax professionals can provide insights into optimizing your tax strategy and staying compliant with new regulations.

By proactively managing taxes and staying informed about the latest changes, small businesses can reduce their tax burden, ensure compliance, and focus more resources on growth and development.

3. Exploring Alternative Funding: Innovative Solutions for Small Businesses

When seeking external funding, small businesses typically start with bank loans. However, a study by The Hartford revealed a growing openness to alternative funding options, with 42% of small businesses considering non-traditional lenders. This trend is especially prevalent among business owners under 34, and the pandemic has accelerated the shift, as many fintech companies were authorized to process PPP applications and facilitate loans.

A crucial first step in securing funding is to prepare a comprehensive financial statement. This document provides a formal record of your company’s financial activities, current status, and future performance projections. Financial statements are essential for audits and are invaluable for tax, financing, and investment purposes.

Alternative Funding Methods:

  1. Crowdfunding: Crowdfunding is the most popular form of alternative financing. Platforms like Kickstarter and Indiegogo offer “reward-based” crowdfunding, where backers receive pre-sale products or other rewards in exchange for their donations. While the U.S. Chamber of Commerce notes that the average campaign raises around $7,000, there are notable exceptions. For example, the game “Exploding Kittens” raised over $8 million on Kickstarter.Newer forms of crowdfunding are also emerging, such as:
    • Debt-based Crowdfunding: Platforms like Prosper, Kiva, and Lending Club offer peer-to-peer loans where businesses can raise capital through loans or promissory notes at fixed interest rates.
    • Regulation Crowdfunding: This allows eligible private companies to offer and sell securities to raise up to $1,070,000 within a 12-month period. Businesses must disclose information to the SEC, investors, and the broker-dealer or funding portal, and all transactions must occur online through an SEC-registered broker-dealer or funding portal. The SEC reported that between 2016 and 2018, 539 offerings raised at least their minimum requested funding, with a median amount of approximately $107,367.

    Equity Crowdfunding: Platforms like CircleUp facilitate equity crowdfunding, allowing businesses to raise capital by offering shares in their company.

  2. Community Development Financial Institutions (CDFIs): CDFIs are private financial institutions that provide loans to businesses that might not qualify for traditional bank loans due to low credit scores or lack of collateral. Regulated by the U.S. Treasury Department, CDFIs focus on serving low-income families, high-poverty communities, and underserved populations. According to recent data, nearly 75% of CDFI lenders’ portfolios target these groups. The U.S. Small Business Administration has introduced the Lender Match tool to help small businesses connect with CDFIs.

By exploring these alternative funding methods, small businesses can diversify their financing options, increase their capital, and reduce reliance on traditional banking. This approach not only broadens financial opportunities but also aligns with the evolving landscape of business funding, fostering resilience and growth in the small business sector.

4. Asset Leasing: A Strategic Financial Solution for Small Businesses

Recent data from the Equipment Leasing and Finance Foundation indicates that leasing is currently the most popular method of financing assets, surpassing the use of lines of credit or secured loans.

Leasing offers numerous advantages, particularly in terms of preserving cash flow within the company—a critical factor in today’s economic climate. A survey conducted by the Equipment Leasing and Finance Foundation in September revealed that 91% of 75 equipment finance company respondents have provided payment deferrals, including extensions, modifications, or restructuring, to support businesses during challenging times.

For small-business owners, it is crucial to stay informed about the changes in accounting rules for leases. Notably, all leases must now be reported on the balance sheet. This change ensures greater transparency and accuracy in financial reporting, allowing businesses to maintain a clear and comprehensive view of their financial obligations.

By opting for asset leasing, small businesses can enjoy the following benefits:

  1. Cash Flow Management: Leasing helps maintain liquidity by spreading the cost of expensive equipment over a fixed period, reducing the immediate financial burden.
  2. Flexibility: Leasing arrangements often come with flexible terms, allowing businesses to upgrade or replace equipment as needed without significant upfront costs.
  3. Tax Advantages: Lease payments can often be deducted as business expenses, potentially lowering taxable income and improving overall financial health.
  4. Access to Latest Technology: Leasing enables small businesses to access the latest technology and equipment without the need for large capital investments, ensuring they remain competitive in their industry.

Small-business owners should consider leasing as a strategic financial tool to manage assets efficiently while keeping cash available for other critical business needs.

5. Insurance: Essential Protection for Small Businesses

Is your business adequately protected if a client gets injured on your premises? The Hartford reports that the average customer injury or property damage claim amounts to $30,000, underscoring the critical need for comprehensive insurance coverage.

The U.S. Small Business Administration identifies six types of insurance every small business should consider, tailored to the specific nature of the business:

  1. General Liability Insurance: Protects against claims of bodily injury, property damage, and other liabilities.
  2. Product Liability Insurance: Essential for businesses that manufacture or sell products, covering against defects that cause harm.
  3. Professional Liability Insurance: Also known as errors and omissions insurance, it covers professionals against claims of negligence or malpractice.
  4. Commercial Property Insurance: Protects business property from risks such as fire, theft, and natural disasters.
  5. Home-Based Business Insurance: Provides additional coverage not typically included in homeowners’ insurance for home-based businesses.
  6. Business Owner’s Policy (BOP): A comprehensive package combining several types of insurance commonly needed by small businesses.

Additionally, small businesses must consider:

  • Commercial Auto Coverage: For vehicles used in business operations.
  • Workers’ Compensation Insurance: Mandatory for businesses with employees, covering medical costs and lost wages for work-related injuries.

Significantly, many small businesses overpay for workers’ compensation insurance. Experts estimate that 75% of companies pay more than necessary, highlighting an opportunity for substantial savings.

By ensuring robust insurance coverage, small businesses can safeguard against potential financial losses, ensuring stability and peace of mind as they grow and thrive.

Comprehensive Risk Management for Small Businesses

In addition to traditional insurance, it is crucial for small businesses to consider cybersecurity insurance to mitigate the risks associated with data breaches or ransomware attacks. This specialized insurance can provide coverage for financial losses, legal fees, and recovery costs associated with cyber incidents.

Having a comprehensive understanding of all your financial and risk management options is essential, especially when facing potential cash shortfalls. Successful small businesses employ a multi-faceted approach, including:

  1. Monitoring Cash Flow: Regularly track and analyze cash flow to ensure liquidity and identify potential financial issues early.
  2. Proactive Tax Management: Stay informed about tax obligations and leverage tax credits and deductions to minimize liabilities.
  3. Exploring Alternative Funding Options: Be open to innovative funding solutions like crowdfunding, peer-to-peer lending, and Community Development Financial Institutions (CDFIs).
  4. Utilizing Asset Leasing: Preserve cash reserves by leasing equipment and other assets, benefiting from flexible terms and tax advantages.
  5. Comprehensive Insurance Coverage: Protect your business from various risks with general liability, product liability, professional liability, commercial property, and cybersecurity insurance.

By integrating these strategies, small businesses can build a robust financial foundation, navigate challenges effectively, and ensure long-term success and stability.

Leveraging NetSuite for Financial Efficiency

Implementing a robust financial management system like NetSuite can significantly enhance the financial efficiency of small businesses. NetSuite is a comprehensive cloud-based enterprise resource planning (ERP) platform designed to streamline various business processes, including financial management, inventory control, and customer relationship management.

Benefits of Using NetSuite for Small Businesses:

  1. Real-Time Financial Visibility: NetSuite provides real-time insights into financial performance, allowing business owners to make informed decisions quickly. With customizable dashboards and real-time reporting, you can monitor key metrics such as cash flow, revenue, and expenses at a glance.
  2. Automated Financial Processes: By automating routine financial tasks such as invoicing, billing, and payroll, NetSuite reduces the risk of human error and frees up valuable time for your team to focus on strategic activities. Automation also ensures timely and accurate financial reporting, which is crucial for compliance and decision-making.
  3. Streamlined Tax Management: NetSuite’s tax management capabilities help businesses stay compliant with local, state, and federal tax regulations. The platform automatically calculates taxes, generates necessary tax forms, and keeps track of changing tax laws, ensuring your business avoids costly penalties and audits.
  4. Enhanced Inventory Management: For businesses dealing with physical products, NetSuite’s inventory management module provides comprehensive tools to track inventory levels, manage reorder points, and optimize stock levels. This helps in maintaining adequate inventory without tying up too much capital in unsold goods.
  5. Scalable Financial Solutions: As your business grows, NetSuite scales with you, offering advanced features and integrations that support expanding operations. Whether you’re adding new product lines, entering new markets, or acquiring other businesses, NetSuite’s flexible architecture adapts to your evolving needs.
  6. Improved Customer Relationship Management: Integrating financial data with customer relationship management (CRM) tools in NetSuite provides a holistic view of customer interactions and transactions. This integration enables better customer service, personalized marketing, and more effective sales strategies.
  7. Robust Security and Compliance: NetSuite ensures that your financial data is secure with advanced encryption, role-based access controls, and regular security updates. The platform also supports compliance with industry standards and regulations, providing peace of mind for business owners.

Incorporating NetSuite into your small business operations can lead to significant improvements in financial efficiency and overall business performance. By leveraging its powerful features for real-time financial visibility, automation, tax management, inventory control, and customer relationship management, small businesses can achieve greater accuracy, compliance, and scalability. This holistic approach not only streamlines operations but also positions your business for sustainable growth and success in a competitive market.

Conclusion

In today’s dynamic business landscape, small businesses must adopt comprehensive financial management strategies to ensure resilience and growth. By implementing robust practices such as cash flow monitoring, proactive tax management, exploring alternative funding, utilizing asset leasing, and ensuring comprehensive insurance coverage, businesses can navigate financial challenges with confidence.

Integrating advanced tools like NetSuite further enhances financial efficiency, providing real-time insights, automating routine tasks, and ensuring compliance with evolving regulations. With NetSuite, small businesses can streamline operations, optimize resources, and scale effectively, positioning themselves for long-term success.

Embracing these strategies and leveraging the right technology will empower small businesses to thrive, even in the face of uncertainty. By staying proactive and informed, small business owners can create a solid foundation for sustainable growth, ensuring they continue to serve their customers, support their employees, and contribute positively to their communities.

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Five Financial Pillars for Building a Robust Small Business
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Five Financial Pillars for Building a Robust Small Business
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Master the financial pillars for small businesses with tips on cash flow, taxes, funding, asset leasing, insurance, and leveraging NetSuite.
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ABJ Cloud Solutions
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