This article was contributed by Wayne Elsey, founder and CEO of Sneakers4Funds.

Did you know that running out of capital is the second most common reason small businesses fail? Starting and running small businesses is undoubtedly expensive, so businesses need to be smart with their money from day one.

Whether you’re just starting or have been operating for a while, you need to do all you can to keep raising profits rather than operating at a loss. In this guide, we’ll cover basic financial management tips you can practice to realize your financial goals.

Create a detailed business budget

A budget helps you control where your money should go and defines business priorities. Maintaining and monitoring a budget also helps you proactively identify and solve financial gaps so you can spot areas where you are overspending or underfunding. Bank of America provides these tips for getting your small business budget up and running:

1. Calculate your revenue. Include your revenue streams over the last 12 months to determine your monthly income. If your business is new, refer to industry benchmarks as estimates.
2. Add up your fixed costs. Items like rent, payroll, and debt repayment fall into the fixed costs category.
3. Determine your variable costs. This includes billable labor, materials, transaction fees, and utilities.
4. Subtract your fixed costs from your variable costs. This number indicates what it costs to produce your product or service. Any fluctuation in cost affects your net income, and the amount left over is money you can use to reinvest in your business growth.

Set aside a contingency fund in case unexpected costs sneak up on you. Aim for 10% of your annual revenue or at least three months’ worth of expenses in the bank. For example, if your overhead costs are $20,000 a month, aim to have $60,000 in your emergency fund.

Set informed financial goals

By setting informed financial goals, you’ll build a clear roadmap for your business decisions and better understand how your day-to-day operations contribute to your overall success. Clear goals also help you measure progress and motivate your employees to work toward predefined milestones.

Start by looking at your business’s current financial standing, including revenue, expenses, profit margins, and debt levels. Then, research relevant market trends and benchmarks to set realistic and informed goals. For example, a new gym could rely on market research to break down its financial goals using the SMART goal framework:

• Specific: Increase membership base by 20% within the next year by attracting more local residents through community engagement programs.
• Measurable: Count the number of memberships each month and compare it to previous months and the average membership count for new gyms in the area.
• Achievable: Plan marketing strategies to engage new members, launch a referral program to incentivize current members to help with recruitment, and offer a free class for first-time members.
• Relevant: Each of the above tactics would be well-researched and make sense within the context of local demand and current gym capacity. They also support the gym’s goal of becoming the community’s leading fitness provider.
• Time-bound: Set a target of increasing membership by the end of 12 months, tracking progress, and adjusting strategies accordingly.

Generally, if your goals follow this framework and make sense in the context of current market benchmarks, you’ll be on the right track. To parse your goals out further, consider separating them by long-term vs short-term goals so you don’t catch yourself waiting to complete a task that should have been prioritized as an urgent, short-term goal.

Regularly monitor cash flow

Set up a cash flow statement that tracks how money comes in and goes out of your business. This statement helps you maintain compliance and also helps you understand your net increase or net decrease for each accounting period, giving you a clearer picture of your overall financial health. Here’s how you can get started measuring and managing cash flow:

• Implement a cash flow management system or accounting software to track and manage your money.
• Analyze your cash flow statements to understand the cadence of your inflows and outflows. Specifically, you’ll want to pay close attention to accounts receivable and payable. Accounts receivable define the money owed to you, and accounts payable define the money you owe.
• Plan for seasonal variation to maintain financial stability. Calling back to our gym example, the business may anticipate higher membership periods during the beginning of the year as people often set fitness-related New Year’s resolutions.

Your cash flow statement is a resource to facilitate planning for future expenses and investments based on cash availability. Refer to it often to understand and anticipate your specific cash flow trends, so you’re not surprised.

Diversify revenue streams

Diversifying your revenue streams to mitigate risk and safeguard your small business against unexpected economic shifts is essential. While it will take additional time and effort, diversifying your revenue streams will stabilize your business and set you up for long-term success even if you lose market demand. Here are a few new ways you can bring money into your business:

• New products and services. Research new markets in your area and offer adjacent products or services that cater to them. For example, a gym may provide personal training in addition to group fitness classes and trendy merchandise to attract new customers.
• Government grants or loans. Look for government grants or loans that you can afford to support business expansion. There are many grants available, ranging from technology grants to research and early-stage innovation.
• Collaborations or partnerships. Team up with a like-minded organization to pool your resources and expand your audience. For example, many corporations partner with nonprofit organizations as part of their CSR initiatives.
• Online courses. If your business has notable expertise in a particular area, consider offering online courses or hosting webinars. For instance, educators, fitness trainers, and other service-oriented professionals lend themselves well to online courses.

In addition to diversifying your offerings, consider how to widen your audience and deepen your relationships with existing customers.

This may include researching and getting involved in your customers’ concerns. For example, if your community is interested in furthering sustainability, you could facilitate a shoe recycling program by collecting donated sneakers and shipping them to be reused in developing countries. If you partner with an athletic shoe recycling provider like Sneakers4Good, you can even earn money from your program to donate to social good causes.

Seek professional input

If you’re new to the small business space, you might consider seeking professional input early and often through casual mentorship meetings and networking events. Or, you can invest in a dedicated accounting professional to help you prepare and navigate more complex matters. Jitasa’s accounting guide points out that a professional can provide expertise in the following matters:

• Reviewing your organization’s accounts.
• Balancing transactions.
• Compiling financial statements.
• Preparing for audits.
• Filing tax forms.
• Analyzing operating budgets.
• Maintaining Generally Accepted Accounting Principles (GAAP).

These professionals can help keep your organization in top shape by ensuring compliance, saving time, and assisting with cash flow management.

However, before you partner with an accountant, narrow down your needs to see if you might be better suited for a bookkeeper. If you’re looking for someone to help you establish the groundwork for accurate record-keeping, a bookkeeper might be your best choice. On the other hand, if you need high-level analysis and compliance assurance, an accountant would likely be your best bet.

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Financial management is an essential ongoing process for small businesses. Incorporate these tips and best practices into your business strategy to maintain peak financial health as your business grows and evolves.

Author: Wayne Elsey
Wayne Elsey is the founder and CEO of Elsey Enterprises (EE) and a member of the Forbes Business Development Council. Among his various independent brands, he is also the founder and CEO of Sneakers4Funds, which is a social enterprise that helps schools, churches, nonprofits, individuals and other organizations raise funds while helping to support micro-enterprise (small business) opportunities in developing nations.