3 Key Tips for Managing Business Finances in 2023

Money management is always a critical element in running and growing your business, however current economic dynamics suggest an even shrewder approach to your business finances is likely warranted as we continue to move through the new year.

While inflation seems to be ebbing a bit and fuel costs have been plummeting for a few months now, the cost of goods and services in most sectors are still at an all-time high. Then there is that pesky interest rate that the Federal Reserve continues to hike in its attempt to curb jaw-dropping inflation. Borrowing costs are at a 15-year high and no rate reductions are expected until at least 2024.

This all means that money is more expensive and harder to come by, putting a damper on overall cash flow and business owners’ ability to invest in inventory, acquire more talent, and finance overall company growth.

Every business owner who weathered the pandemic storm understands what it means to tighten their metaphorical belt, so in all likelihood, navigating business finances in 2023 should be a manageable undertaking, as long as one takes a smart and metered approach.

Here are 3 Key Tips on Managing Your Business Finances in 2023:

1. Maintain Financial Reports. Monitor the movement of your money. Every business owner should have a firm grasp on their Balance Sheet, Cash Flow Statement, and Profit and Loss Statement. Being able to understand your financial reports well enough so you can explain them and ask great questions is critical. The financials of your business tell a story and there are ways you can save money, increase your cash flow, and increase the ROI for the money you spend.

Below are three key financial reports and why they’re so important:

Income Statement (or Profit & Loss)

Income Statements are meant to be generated and reviewed on a monthly basis. The focus is on closely monitoring revenue that’s coming in and expenses that are going out.

The Income Statement looks at operating profit and profit in general.

Operating profit shows the profit made from the normal operating activities of the business—which generally come from sales, minus the cost of goods, services, and salaries. For businesses mired in debt, a strong operating profit could be a sign that the business will be able to work itself free of its debt over time.

Cash Flow

Sales growth, gross profits, and operating profits are essential to every business, but the key insight owners are looking for is whether the company is generating positive cash flow.

If your cash flow forecast shows that your company is not generating cash for the business, you know it’s time to take action on the finances in your business.

A Cash Flow Statement usually consists of a record of:

• Cash generated by daily business activities and corresponding expenditures such as salaries, interest payments, and operating costs
• Funds gathered or spent through investment-related actions
• Cash obtained via debt and debt repayments

Business leaders, generally optimistic by nature, can sometimes overestimate the amount of capital their business is likely to generate, thereby distorting their budgeting strategies. That’s why it’s essential to predict cash flow more accurately during different times of the year, so you’re not caught off-guard by future developments.

Balance Sheet

“The balance sheet is the cornerstone of a company’s financial statements,” notes Business News Daily, “providing a snapshot of its financial position at a certain point in time.”

A Balance Sheet outlines:

• A company’s assets, including cash, accounts payable, inventory, intellectual property, etc.
• A company’s liabilities, encompassing money owed to third parties (a bank, vendor, etc.) and, where applicable, deferred taxable liability (that is, taxes owed that have but still unpaid)
• A company’s equity, funds that support the growth of the business, such as an owner’s investment, cash acquired from shares sold in the business, or financial reserves accumulated through outside investors

When a CEO or owner compares Balance Sheets from month to month and year-to-year, they can pinpoint trends that lead to more accurate financial planning.

2. Improve Your Accounts Receivable Process. If your business is feeling the economic pinch, so are your customers. Facilitating customer payments is essential to staving off accounts receivable aging, if possible, and providing customers with easy payment options. If you have customers who are struggling, consider creating reasonable payment plans spread over a defined period. Remember that goodwill is an essential element in Customer Loyalty.

Unfortunately, not all clients pay their bills on time. Some go into arrears for weeks, months, or even years. This leaves the business who delivered the original goods or services essentially “out of luck” until (or if) the client decides to pay.

But rather than wait passively to see if this will happen, here are proactive tips to improve your company’s A/R status, and help make payment possible:

Get the process in order.

One common impediment companies face is the lack of a standard procedure by which to invoice and facilitate payment by customers. As we have noted elsewhere, it’s imperative to do a “comprehensive evaluation of past due clients and take the appropriate action to collect payment in as timely a manner as possible.

Another step — update your A/R process to invoice immediately upon receipt of your products or services, rather than invoicing on pre-specified days of the month.

Enlist the services of your skilled employees.

It’s vital for employees charged with collecting on invoices to go about the task in in a respectful way. While, of course, it is important to collect outstanding payments, you also want to keep great customers. How you treat someone is a reflection on your brand and may have an impact on future revenue.

Make a payment plan available to clients.

One issue around A/R is that some businesses simply are unable to pay the full amount of what’s owed at a given time. For this reason, consider drawing up a payment plan that makes sense for all involved. One option is to spread payments over an agreed-upon period of time (say, 12-14 months) which may make it easier for a struggling customer to come through with needed payments. This can also provide a favorable “bump” in your cash-flow situation.

Redesign the company invoice.

Sometimes, the problem relates to a simple misreading of your company invoice. If details are vague or language is unclear, it’s easy for the customer to delay payment. Ensure your invoice has all the relevant information and nothing more. This will reduce ambiguity and phone calls thereby delaying payments.

Pay attention to the tone of your communications.

Ill-tempered or otherwise antagonistic messaging around payment due rarely achieves the desired result. Your initial contact with a delinquent client should take the form of a professional “friendly reminder” call, with a willingness to listen to what that client has to say.

These are challenging times for all businesses, so being respectful in tone and offering payment alternatives may be the best approach to collecting on accounts receivables. Your best customers will appreciate you.

3. Create a Cash Flow Forecast. A cash flow forecast is an important finance tool that provides businesses with the visibility and control to make informed decisions. Creating a cash flow projection for 2023 will allow you to estimate the money you expect to stream into and out of your business over the course of the entire year. Cash flow fuels your business – and business owners who pay close attention to it have an exponentially better grasp of future threats and opportunities.

No one can say for sure just how volatile 2023 will be for small businesses, but business owners who understand and embrace these simple finance best practices are much better situated in any economy.

Dedicated to your success!