Small Business Management: How to Stay On Top of Your Finances and Increase Your Company’s Credit Score
As a small business owner you wear many hats. Everything from calming an irate customer, to cleaning the restroom, to managing your staff can ultimately end up on your to-do list. But some things on that list are more important than others, and keeping your business credit score healthy is right at the top.
According to Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia 45% of small business borrowers who are turned down by creditors are rejected because of their credit scores.
And for many companies having a less-than-stellar credit score comes down to poor small business management.
So, to help keep your finances in check, let’s take a look at the things experts widely recommend you can do to manage your business better, and keep or improve a good credit standing.
Basic best practices for small business management
Patricia Engel, a St. Charles, Illinois based specialist in small business consulting and tax preparation, is all about the basics — i.e., starting out right and keeping on track. Pat points out things that should be obvious to every independent business owner, but very often are not:
Keep your personal and business finances separate. You need a business checking account and a credit card that is for business use only. These accounts should never be used for personal expenses.
You can’t afford to neglect your personal credit score either, especially when your business has a small number of employees.
According to Experian, lenders in this situation will look at both your business and personal credit scores.
Never use your house for collateral on a business loan. If you default on the loan you could lose your home.
Don’t borrow or take money from your retirement account to fund your business. This can cost you big bucks. You’ll pay tax on the withdrawal if you don’t return the money you borrowed back to the retirement account within 60 days. And if you’re younger than 59½ you’ll pay an additional 10% penalty.
Day-to-day bookkeeping is critical. It’s hard to make good decisions when your books are a mess. It’s also tough to have to pull it all together at tax time. Your banker will want to see your books as well whenever you apply for financing.
File all of your tax returns on time. This includes sales, payroll, and income taxes. The penalties on filing late are steep.
Develop a team to help you make the right decisions and stay on track. Your team should include an accountant, attorney, banker and an insurance agent. You likely already have this team in place, but may not share the same important information with each one. Each person plays a different role on your path to success.
Bring in the pros when you need them. You are the expert in your chosen field, that’s why customers come to you. Your focus should be on growing your business, not trying to figure out business law, tax law, leasing or insurance. And besides, it will cost you more to sort through the mistakes you make trying to be what you’re not than it would have been to seek expert advice in the first place.
Check your business credit report on a regular basis. Just like you monitor your personal credit score, you should check your business credit for errors and inaccuracies. If you find a mistake get it fixed before applying for financing.
How to leverage a line of credit for your business
Cash flow measures the amount of money that comes in to a business and goes back out, resulting in available cash. When business is slow you still need funds to run your business, and high interest credit cards aren’t always the way to go.
Bob and Shirley Ferguson, owners of the highly successful Ben Franklin Crafts & Frames in Redmond, Washington, understand the importance of having a cash reserve to tide you over in slow times.
In the early days of their store, Bob and Shirley hated the idea of paying for a credit line that might not ever be used so they became inventory management experts who spent a lot of time monitoring their invoices. When they needed to buy inventory they had to know exactly when the invoice came due so they would have the funds to pay it from current cash flow. This was exhausting but it worked. It also stalled any sales expansion.
Their banker finally convinced them that a credit line of just $25,000 could help them grow sales and the Fergusons went for it. With that credit line as a “just in case” cushion they began to buy in more quantity and within a month sales began to accelerate beyond anything they could have envisioned.
How to manage vendor relationships when cash is tight
A former retailer, Cathy Donovan-Wagner is the founder and CEO of RetailMavens, a Chicago based consultancy that helps clients see more profit and cash flow than the previous years. Cathy shares why it’s so important to be upfront with your vendors when cash flow is tight.
“If you can’t pay your bills, you can’t afford to ignore your vendors. This is the number one mistake that retailers make – I get it, I did too until things got so bad that I really didn’t know when I’d be able to pay them.
So I started making calls and was honest about my situation. It was humbling, and it was hard to do, but it was the best thing I ever did – more than half of my vendors were willing to work with me. When you dig yourself into a hole you can’t ignore collection calls and think that it won’t affect your credit score.”
Keeping your small business financials under control
Request delivery dates. Before you place an order ask yourself when the product actually needs to arrive, and let the vendor know what you need. It makes no sense to take late-season deliveries (think holiday decor two weeks before Christmas) if that can hurt your sales and your cash flow.
It’s just as foolish to receive goods – and have to pay for them – far in advance of your actual need time. So request delivery dates; you won’t always get your terms, but if you don’t ask, the vendor will always get theirs.
Stop spending money on things you don’t need. An easy way to ruin your credit rating is to rack up expenses for things you don’t need. Like that online whatever you pay for each month but never use. Develop a cost-cutting mindset and look at every dollar spent in your business as unnecessary.
Control your spending by setting and sticking to a budget. Begin by reviewing your list of expenditures for each of operation. Next, choose a random figure based on what you spent last year – that’s your new, non-negotiable monthly budget. And it’s all the money there is to spend on each of the categories you identified.
Make your staff come to you before making a purchase. It’s a lot easier to spend money when you don’t have to justify why you are spending it. When you hold your staff accountable for every dollar, they will be less likely to ask for something unless they really need it.
Personally sign every check. Or meet with the person who does to review how your money is being spent. Note payment due dates – are they being met? This review will help you uncover problem areas, unnecessary expenditures and expenses you may not be aware you had.
The bottom line
It’s never too late to keep a closer eye on your business. Monitor your current business credit score and make adjustments as necessary for improvement. Be aware of how you spend money, and diligent about how you play your bills. Sweat the small stuff and this time next year you will be in a much better position credit-wise than you are today.
About Georganne Bender
Georganne Bender is a consumer anthropologist, keynote speaker, author and consultant who has helped thousands of businesses in the retail, restaurant, healthcare, hospitality, death care, travel, beauty, tech, sales and service industries since 1990.
As global retail thought leader, Georganne is listed among the Top 40 Omnichannel Retail Influencers, Top 100 Retail Influencers, and the Top Retail Industry Experts to Follow on Social Media. She serves as BrainTrust panelist for RetailWire and is a partner and emcee for the popular Independent Retailer Conference.