If you’ve ever wondered if there are certain qualities that make for a successful small business, you’re not alone. While there’s no magical formula for being financially healthy, the “Small Business Financial Health Analysis” (PDF), put together by The Federal Reserve Banks of Chicago and San Francisco, Pepperdine University, and online lending resource FundWell, shows there are four practices that successful businesses share.
For the survey, more than 900 businesses were asked about their knowledge of financial products, the credit experience of business owners, and financial planning and management practices. Here are the four practices that were common among successful small businesses.
1. Strong Knowledge of Credit Products — And Experience Using Credit
If terms like inventory financing, accounts receivable financing, or trade credit make you scratch your head, you might want to bone up on those topics.
The survey showed that the majority of businesses in excellent financial health were very knowledgeable about financial terms and credit products.
And while taking out a business loan isn’t necessarily an indicator that a business will succeed, 75 percent of those surveyed with excellent financial health have, indeed, secured financing from a bank.
2. High Level of Unused Credit Balances
Financially healthy businesses have credit to spare. Meaning, they do not max out their credit cards and loan borrowing capabilities.
Conversely, the less successful businesses tended to max out — 65 percent of those in poor financial health had no credit available, at all.
3. Budget for Business Expenses
You might think that budgeting is a no-brainer. Nope.
What’s surprising is that apparently not every business budgets for expenses — not by a long shot. Could it be due to lack of organization, or lack of a good accounting software to use, or something else? Whatever the reason, those that did not budget fell into the camp of the less financially healthy.
Not only did 60 percent of the most financially healthy businesses budget for business expenses, but they also had a separate bank account for their business transactions.
4. Set Aside Cash for Payroll – And Don’t Use It For Anything Else
There’s nothing that drives a company into closing up shop faster than not paying employees on time. Even worse is the situation of a company that doesn’t pay payroll tax withholding to the government in a timely manner. The IRS will put you out of business fast if that situation lingers.
Take a note from successful companies, 90 percent of which always have enough money in the coffers to pay employees. They also have enough to cover payroll taxes, health insurance and benefits expenses.
Who Runs These Financially Healthy Businesses?
If you’re curious to see who’s behind these thriving small businesses, the survey contains that information too. The majority of these financially healthy companies, more than 72 percent, are male or non-minority owned. That’s possibly because this group has traditionally received more business loans in the first place. Thus, they have had more experience with credit and financial management.
By contrast, just 28 percent of the companies surveyed were run by women, and 21 percent by minorities. Across the survey, women and minorities scored well on knowledge of credit products. But when it came to credit experience and financial planning and management, they performed lower.
Minority entrepreneurs still have a more difficult time than other entrepreneurs when it comes to securing a loan, claims a report by The Washington Post. But programs are currently under way to see that women and other minority small business owners have more access to funding for their ventures as well. So this may lead to higher financial health among women and minority owned businesses in the near future.
If a business finds itself getting close to not meeting payroll obligations it usually is the symptom of other, larger problems that do indeed sink the business very quickly.
Ideally, that’s how businesses should function – however, there are some problems that you just cannot expect. And that’s when credit cards are maxed out. But still, this is still a good guide for getting that financial state in check.