Financial management doesn’t have to be the aspect of business that keeps you up at night. While many entrepreneurs panic over spreadsheets and tax codes, you should know one thing: you don’t need to have a master’s degree in finance to manage your business finances properly. You need to grasp some fundamental concepts, and once you do, everything about managing money becomes more straightforward.
Cash Flow Is More Critical Than You Realize
Cash flow is the lifeblood of your business. Exiting and entering in higher numbers than your expenses and outgoings isn’t everything. Sometimes cash flow looks good on paper, but timing will be the blow if the cash isn’t there when the bills are due.
The businesses that don’t go under are often the ones that keep their cash flow tightly controlled. When are your major quarterly expenses or operating costs due? How long does it usually take customers to pay you? What is your minimum necessary cost to keep the business afloat every month? Once you determine patterns, you can plan and avoid mishaps.
Many business owners project their cash flow three months in advance. This projection gives you breathing space to determine if you’ll spend, need help or if more funds should be invested in the business. When cash flow planning is done appropriately, you’ll discover deficits before they turn into catastrophes.
Keeping Your Records Organized
Who enjoys bookkeeping? But when books are in order, it becomes much easier to distinguish what aspects of your business work, where you’re sinking money, and opportunities that could exist.
The first rule is separating business from personal expenses. This seems obvious, yet many business owners fail to distinguish these accounts during start-up. The existence of a business account makes things easier on the person doing the bookkeeping because it’s cut and dry and protects the owner should they be subject to inquiry.
Working with a tax accountant who understands your specific situation can set you up with systems that actually work. Professional help here usually pays for itself through better planning and avoiding expensive mistakes.
Save every receipt, invoice, payment, contract, etc., as digital files make this less of a headache. Whether you’re checking your numbers or approaching tax season, it’s better to have everything in one location.
What Your Financial Statements Mean
Your financial statements tell you about your business’ status. The three main reports—profit and loss statement, balance sheet and cash flow—tell you different things.
Profit and loss (P&L) statements demonstrate that you’ve made or lost money during a specific period—periods being monthly or quarterly. It’s simple math: what you brought in minus what you spent equals profit or loss. Most businesses look at these statements weekly or monthly for large expenditures to determine trends or what’s occurred during holidays or quarterly business ventures.
Your balance sheet represents what you own and owe at a specific point in time. This includes your assets; liabilities; and what is left over equity. A snapshot of where you stand at one point gives you perspective on certain investments and debts.
The cash flow statement represents the money coming in and out of the business. This matters because although the P&L statement may show profitability, there may be no cash on hand. For example, a seller may have sold a product but still has not been paid for it yet or they may have paid for something that does not hit the balance sheet until later.
You don’t need to become an accounting expert, but understanding what these reports are telling you will empower you to make better decisions for your company. The numbers aren’t there to stress you; they’re there to help show what’s working.
Dealing with Taxes Doesn’t Need to Be Overwhelming
When is the last time getting taxes done caused anyone joy? The businesses that find this easy think about taxes all year long; not just in April.
Putting money aside for taxes is critical. Acceptable numbers range from 25-30% of what you’ve profited throughout the year (although this can go up or down based on how your business is organized and how much you’ve made). You don’t want your taxable income to come up with no cash available to give.
Make sure you’re keeping track of what’s deductible as you go along. Business meals, travel, equipment, software purchases, even contracts/services renderable deductible at the end of the year. But if you’re going through papers every April getting receipts for dinners from four months ago, that’s too late.
If you’re self-employed or your business doesn’t take taxes from your paycheck automatically; you’ll also have to pay quarterly taxes. Missing quarterly payments incurs penalties; don’t miss these deadlines—act like it’s any other strict deadline in your day.
Building a Nest Egg
Every business has its hard moments. What separates them from becoming real catastrophes is whether there’s a cushion.
You should aim for three to six months of operational expenses available in a business savings account. This number may seem overwhelming but begin smaller with building up overtime. Even having one month of expenses gives you wiggle room for problems.
Having this cushion alters your operations. You can say no to clients who aren’t a fit. You can invest when the opportunity arises. You can afford unexpected expenses without scrambling. When you’re backed by options, you can run your business instead of having it run you.
Continue Educating Yourself About Finances
You won’t wake up one day financially confident. Each month pick a topic—learning about financial reports; researching what IRS would apply better for you based on your chosen structure; or learning about deductibles—that will step up your game.
Speak to other entrepreneurs—most learn about their money troubles through genuine conversations instead of literature they’ve read; those who’ve been there can tell what’s worked, what hasn’t, and their mistakes so you don’t have to make them yourself.
Always ask questions if you’re uncertain about something related to finances; your accountant, banker or even other entrepreneurs will appreciate your inquisitiveness. It shows that you’re serious about getting it right. The only stupid question is one that isn’t asked.
Financial literacy becomes easier over time through practice and knowledge-building. What seems hard today becomes second nature tomorrow if put into practice. Companies that withstand the test of time are those that don’t focus only on financial savviness come April for tax season; they make it their business throughout the entire year. Start where you’re at right now—confidence will build gradually over time. The financial foundations you’re creating now support everything else you’d ever hope to do within your company.
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