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Six Signs of Scary Financial Management for Small Businesses

Wide shot of a dark country road with storm clouds and a dead tree

Financial management for small businesses can seem like a daunting, scary endeavor. However, if you hide from it, your finances will haunt you for years to come. 

Therefore, today we’ll explore 6 signs of scary finances that small business owners might face. With Halloween just around the corner, we want to turn your financial planning into a sweet treat!

1 | No Cash Reserves

Nothing scares small business owners more than concerns about running out of cash. Will you have enough cash to pay your employees and bills during a frightening financial time? The hardest lesson many small business owners learned during the COVID-19 pandemic is the importance of having cash reserves for an emergency.

To build a strong financial management plan for your small business, you must incorporate saving enough to cover at least three months’ worth of operating expenses. Keep in mind, it may take time to build your reserves. Therefore, set aside a little each month. You can also explore a line of credit as an alternate source of funds. Do not procrastinate. The best time to apply for a line of credit is when you don’t need it.

2 | Insufficient Insurance Coverage for Your Small Business

It’s scary to think about the financial risks you are taking by starting your own business or scaling up a small business. Therefore, insurance policies are meant to protect what you’re working so hard to build. They hedge the risk of financial loss.

In addition, common business insurance policies include general liability, professional liability, property insurance, and workers’ compensation.

Make a practice of reviewing your insurance policies each year. If your business has changed significantly, your coverage might not be sufficient anymore. Need help reviewing your finances and determining what type of insurance policy is best? Let Momentum CFO help you review your policy options to ensure that you don’t experience financial hardship in the event of a loss.  Let’s chat!

3 | Highly-Aged Accounts Receivable

Are your customers tricking you by not paying your invoices on time? If you offer your customers payment terms of 30 days, 45 days, or even longer, keep an eye on whether they’re paying you by the due date. 

Are a large percentage of your accounts receivable over 60 days past due? If so, follow up with those customers ASAP. The longer an invoice goes unpaid, the lower your chances of collecting. Plus, late customer payments put you in the scary situation of potentially not having enough cash to pay for your own expenses. 

4 | Signing Loan Agreements without Reading the Fine Print

Ready to sign that loan agreement for your small business?  Be sure to read it thoroughly to avoid frightening financial surprises. Are there hidden fees somewhere in the fine print? Penalties for early payoff? What is the APR on the loan?

In addition, the lender may present you with what seems like an affordable monthly payment. But, be sure to do the math. Do you have sufficient cash flow to afford that payment for an extended period of time?

We get it. These documents can be tricky. Need help?  Engage Momentum CFO to review your loan document, and create a cash forecast that accounts for all your expenses, including debt payments.

5 | Too Much Debt

Excessive debt can make you feel buried alive.  How do you know if you have too much debt? Ask your CFO to calculate your debt to equity ratio. Debt to equity ratios indicates how leveraged your business is.

What is a good debt to equity ratio? They vary widely by industry. Industries such as manufacturing are more capital-intensive than others. However, a good rule of thumb is a debt to equity ratio of between 1 and 1.5. Ratios over 2 signal that you may have trouble repaying your debts if the business were to decline. Don’t have a CFO in place yet to help?  Check out our services to see if they are a good fit for your small business!

6 | No Internal Financial Controls

Internal financial controls are designed to prevent fraud and ensure the accuracy of financial processes. A key element of financial controls is the segregation of duties. Segregation of duties involves giving multiple people responsibility for the separate parts of a financial task. 

Let’s use check-writing as an example. There should be at least two people involved. One person should write the check and another person should sign it. If only one person is responsible for this task, he or she could, in theory, write checks to whomever they choose. The inappropriate check payment might go unnoticed, or you might not catch it until it’s already been cashed. At that point, there’s not much you can do about it.

Therefore, ensure that part of your financial management includes setting financial controls to prevent scary financial situations

The Bottom Line on Financial Management for Small Businesses

Small business owners sometimes face scary financial situations. The sweet news is that they don’t need to frighten you. 

Let Momentum CFO conduct a financial health check and create a solid financial management plan for your small business.We’ll identify tricky financial situations that may be hiding in plain sight. Then, we’ll show you how to tweak them to keep your business cash positive with a solid financial strategy. 

Book your free consultation today and let’s work together to ensure your finances aren’t frightening. 

Thanks for reading and have a Happy Halloween!