Small businesses form the backbone of many economies around the world, providing employment opportunities, contributing to GDP, and enhancing economic growth. However, starting and running a small business can be challenging, especially when it comes to financial management. Financial strategy is an essential element of small business success, as it helps owners to navigate the complex financial landscape and make informed decisions that lead to profitability and growth.
Understanding Your Financial Position
Understanding your current financial position is a vital first step in developing your financial strategy. This means taking a close look at your financial statements, such as your balance sheet, income statement, and statement of cash flows. These statements provide valuable insights into your business’s financial health and performance, helping you track progress, identify areas for improvement, and make informed decisions about investments, expenses, and revenue generation.
According to a survey by QuickBooks, 61% of small business owners admit to not fully understanding their financial statements. This lack of understanding can lead to poor financial decisions and missed opportunities for growth and profitability. By taking the time to understand your financial position and develop a financial strategy that aligns with your goals, you can make better-informed decisions and set your business on the path to success. Don’t let the numbers intimidate you, if your eyes glazed over on this section, consult a fractional CFO to translate your financial statements so you really understand your current financial position.
Aligning Financial Strategy with Business Goals
A well-crafted financial strategy aligns with your business goals and objectives. This means taking into account your business’s unique characteristics, such as its industry, size, and stage of growth, as well as external factors, such as the competitive landscape, regulatory environment, and economic conditions.
For example, if your goal is to grow rapidly, you may decide to invest heavily in marketing and product development. Alternatively, if profitability is your primary objective, you may focus on reducing expenses and optimizing your operations. By aligning your financial strategy with your business goals, you can prioritize your financial goals and allocate resources accordingly.
According to a survey by SCORE, only 40% of small business owners have a formal, written business plan. This lack of planning can lead to a lack of direction and focus, making it difficult to develop a financial strategy that aligns with your goals. By developing a clear business plan and financial strategy, you can set a course for success and ensure that your business is moving in the right direction.
Securing External Funding
Securing external funding is a critical step for small businesses that require additional capital to support growth and expansion. However, before providing financing, lenders and investors assess a small business’s financial position, performance, and prospects to determine whether they are a good investment.
A well-crafted financial strategy demonstrates that the business owner has a clear understanding of their financial position, has identified potential risks and challenges, and has a plan to mitigate them. A financial strategy can help small businesses communicate their financial goals and objectives, highlight their competitive advantage, and demonstrate their ability to manage risks effectively. Lenders and investors are more likely to support a small business that has a clear plan for achieving financial success and mitigating risks.
Additionally, a financial strategy can help small businesses determine the appropriate type and amount of funding they need. For example, if a small business needs short-term funding to cover cash flow gaps, a line of credit or working capital loan may be more appropriate than a long-term loan or equity investment. By having a clear understanding of their financial needs, small business owners can identify the right funding options and make informed decisions about financing.
Managing Cash Flow
According to a survey by JPMorgan Chase, 82% of small business failures are due to poor cash flow management. By prioritizing cash flow management and developing a solid financial strategy, small businesses can avoid this common pitfall and set themselves up for success.
By developing solid financial strategy that includes measures such as budgeting, forecasting, and a 12 week cash flow forecast, small business owners can ensure that they have enough money to operate their business day to day. And allows you to plan for critical investments in your business. Rapid growth often creates a cash flow crunch so cash flow planning needs to be an integral component of your financial strategy.
Monitoring and Evaluating Financial Performance
Monitoring and evaluating financial performance is a crucial component of a small business financial strategy. Small business owners need to regularly track key financial metrics such as revenue, expenses, and profit margins, as well as non-financial measures such as sales pipeline, staff utilization rates, and customer satisfaction to stay informed about their business’s overall health.
Identifying and tracking key metrics also allows a small business to benchmark their performance against industry standards and competitors. to help business owners make informed decisions about their financial strategy. By tracking their performance and comparing it to others in their industry, small business owners can identify areas for improvement and make changes to achieve their financial goals.
Benchmarking against industry standards and competitors can also help small business owners understand how their business stacks up against others in their industry. By comparing their performance against industry benchmarks, small business owners can gain insights into their strengths and weaknesses and identify areas where they are lagging behind their peers and make changes to improve their performance.
By analyzing financial data, small business owners can assess the effectiveness of their financial strategies, respond quickly to market changes and make informed decisions about future investments and initiatives.
According to a survey by the Small Business Administration, only 40% of small business owners track their financial metrics regularly. This lack of monitoring and evaluation can lead to missed opportunities for growth and profitability and make it difficult to identify and address financial challenges.
By implementing a robust monitoring and evaluation process as part of their financial strategy, small business owners can stay informed about their business’s financial health and make data-driven decisions. This can help them identify areas for improvement, make adjustments to their financial strategies, and ultimately achieve their financial goals.
Conclusion
In conclusion, developing a financial strategy is essential for small business success. A well-crafted financial strategy can help small business owners understand their financial position, align their financial goals with their business objectives, secure external funding, manage cash flow, and monitor and evaluate financial performance. By taking the time to develop a solid financial strategy and regularly monitoring and evaluating financial performance, small business owners can set their businesses up for long-term success.
If you are ready for to create a robust financial strategy you may need a Fractional CFO to set your business on the right track.
References:
QuickBooks. “Small Business Financial Management Survey.” 2017.
SCORE. “The Megaphone of Main Street: Report on America’s Small Businesses.” 2018.
National Small Business Association. “2020 Small Business COVID-19 Impact Survey.” 2020.
JPMorgan Chase. “Small Business Cash Flow Infographic.” 2017.
Small Business Administration. “Financial Statements: The Foundation of a Business.” 2017.References:
QuickBooks. (2018). State of small business finances. Retrieved from https://quickbooks.intuit.com/content/dam/qb/quickbooks/campaigns/images/2018_State_of_Small_Business_Finances_Report.pdf
SCORE. (2019). The Megaphone of Main Street: Report on America’s Small Businesses. Retrieved from https://www.score.org/resource/2019-megaphone-small-business-report
National Small Business Association. (2021). 2021 Small Business Taxation Survey. Retrieved from https://www.nsba.net/wp-content/uploads/2021/02/2021-Small-Business-Taxation-Survey.pdf
JPMorgan Chase. (2019). Cash is King: Flows, Balances, and Buffer Days. Retrieved from https://www.jpmorgan.com/commercial-banking/insights/cash-is-king-flows-balances-buffer-days