If 2020 has taught us anything, it’s that the unknown is just around the corner. Plus, it’s likely to be more bizarre than we ever imagined. However, that doesn’t mean that a small business should suffer or not be able to weather the craziest of storms. It’s all about preparing for the worst so that you can cope with things as they chop and change.
One of the key things to learn about running your own business is what you can control and what you can’t. The world’s economy is one of the things that you can’t control. On the flip side of that, you can control how you prepare for economic downturns and how well you survive them.
If you can control your finances and ensure you’re in a strong position when times are good, you should make it through the hard times.
Your Emergency Fund Needs To Be Bigger Than You Think
An emergency fund should be a non-negotiable for any small business owner. This fund should be for your salary and running expenses for the business. Remember, if you’re pouring everything of yours into the company, you’ll fast find your personal finances in a serious pickle.
A good general rule of thumb is to have around six months’ worth of expenses at hand. This is because bad periods in the economy are rarely brief. Having six months to work with will give you some breathing room to reassess the world and see how you can adapt to keep your company afloat.
This half a year buffer will also hopefully prevent you from needing to take a loan while you try to right the ship. If you can avoid going into debt (or more debt) during a bad economic period, you’ll likely find it easier to come through the other side.
Prepare For The Worst, Hope For The Best
I know that it’s one of those things that your grandfather would say, but it’s actually quite an effective business technique. If you have a plan to make it through the worst financial times you can think up, you’ll probably be prepared for just about anything the world can throw at you.
At the same time, try not to live in a negative headspace where all you see is the worst in the world. You need to make plans for a positive future and look for ways to sustain and grow your business in any situation. By seeing both sides of the coin, you’ll be able to survive the worst and prosper in the best of times.
Stay Aware Of Current Affairs And Trends
The quickest way to get caught short in bad times is to not be aware that they’re coming. It’s essential that you, as a business owner, stay on top of what is happening in the world. As they say, forewarned is forearmed.
Watching the news, staying abreast of current affairs, and keeping track of local and international stock markets will help you predict what’s coming. You must educate yourself about your local economy and what international actions will have an impact on it. With a little bit of warning, you can tighten up the belt and perhaps even stretch your emergency fund even further.
Regularly Review Your Finances
Knowing the exact status of your company finances at any given time can help you to make sound business decisions. If a disaster hits your area and suddenly, you’re plunged into an economic downturn, it won’t be an easy time to have to get to grips with where your finances are. You need to understand that information before troubles come.
The same thing goes for your business plan and target market. These are areas that should be under constant review throughout the year so that you can ensure you’re focused on the right areas. If you can keep your business in a strong, positive position in good times, you’ll be more likely to outlast the negative times.
Never Mix Business And Personal Funds
This is a big one, especially for companies that are just starting up. Not knowing where your own finances start, and your business finances end can kill your company quickly. The easiest way to keep them separate is to have a business bank account and a personal one. Many sole traders and even freelancers do this to help keep track of their finances.
Another important step to keeping your funds separate would be to implement a good accounting system. There are plenty of accounting software packages that make money management simple. You can track income, expenses, assets and liabilities, as well as noting the salary that you pay yourself.
By staying on top of what funds belong where and who gets paid what, you’ll have a clear view of your current financial position at all times.
Don’t Fall Into a Tax Trap
Whether your business is about selling a product or providing a service, it’s always a good idea to collect the tax at the time of the sale. This money should then be put aside so that you’re able to pay your business tax at the appropriate time. By doing this, you won’t be left scrambling for funds to pay the taxman.
A common mistake that new businesses make is to forget about budgeting for tax. When tax season rolls around, it can be a bit of a shock when you do your return and see how much you need to pay. This is when some business owners dip into their emergency fund to cover the payment. If you’re doing this, it means you’ve overspent and need to reassess your position.
If you aren’t sure about the tax that you need to pay for your business, consider talking to a registered advisor. There are also online tax calculators that can help you with the math.
COVID-19 has been a valuable lesson in expecting the unexpected. Many businesses have taken a knock, and you can learn from them to future proof your finances for the next pandemic, stock market crash, or whatever unknown event comes along next.
This post was written by Megan Hudson, content champion for various online publications, often covering a range of business topics from finance for startups to small business accounting tips.