Best Practices for Managing Business Finances
Finance management is an essential skill for any small business owner. Without it, you risk missing valuable tax deductions and having difficulty securing loans.
Most small businesses rely on some form of debt financing for operations. But excessive debt may prove disastrous and lead to unmanageable cash flows and loss.
1. Set a budget
Finance management takes time and commitment. There are various aspects to keep an eye on, from payroll and health benefits to taxes and inventory; creating and monitoring a budget can help take some of the guesswork out of these business expenses while being prepared for unexpected situations.
To create a budget, first identify all of your company’s fixed expenses such as utilities, advertising costs, professional development fares and supplies. Next, factor in one-time expenses you know are coming up such as purchasing new computers or enrolling in business courses. Finally, subtract your total revenue from these costs to estimate what amount your business needs to cover its expenses.
Once you’ve established a monthly budget, it’s essential that it is regularly reviewed in order to detect any overspending or underspending and make necessary corrections. Furthermore, reviewing it provides a baseline for future predictions as well as giving insight into whether your company’s spending aligns with revenue targets.
Regular budget monitoring provides an ideal opportunity to delegate financial decisions amongst team members, which can be an arduous transition for some business owners, yet necessary as your company expands and you need to trust others with its funds.
Reconciling personal and business accounts regularly will help keep finances organized, while protecting personal assets from a potential business failure. You might also wish to consider investing in a business credit card to simplify digital spending while improving cash management and credit monitoring.
2. Keep track of your expenses
Tracking expenses is essential to business ownership. By monitoring expenses closely, business owners can identify when their spending exceeds necessary amounts and take necessary action. You can do this manually or with accounting software; for the latter option, if using spreadsheets for tracking expenses it’s essential that columns such as “date”, “description”, and “category” be created so you can more easily keep tabs on spending.
As you begin your business venture, it may be tempting to use personal credit cards for business purchases or deposit income into your personal bank account. But this can lead to serious complications later. Instead, the best practice is to open a separate business bank account which keeps business transactions and expenses completely separate from personal ones, making keeping records simpler while providing you with access to a separate business credit/debit card for expenses related solely to business use.
Saving receipts and categorizing each expense made when tracking expenses is key to filing tax returns and taking advantage of deductions and finding cost savings opportunities.
Small businesses should ensure they keep an accurate accounting of accounts receivables owed them for goods or services provided, which includes accounts receivable. Although customers often make late payments, small businesses must not allow this situation to worsen; once someone is 60 days past due, proactive steps should be taken in pursuing payment to prevent creditors or the IRS from taking legal action against the business.
3. Keep track of your income
One of the key steps a business owner must take to be successful is keeping track of both income and expenses. By keeping tabs on these details, you can gain a better understanding of where money is being spent, where costs could be cut back and where savings can be realized; all of which can help save money while increasing profits.
Tracking income and expenses can be challenging, but there are ways you can make it simpler. A key step to make tracking your finances simpler is opening a separate bank account for your business – this way you’ll avoid mixing personal and professional purchases together and make categorizing expenses simpler when tax time arrives.
Be sure to keep receipts for everything incurred to track expenses and claim tax deductions. Furthermore, organize them so they are easy to locate; label receipts by client name or expense category before filing taxes for them.
Finally, it is advisable to regularly review your bank statement – at least daily – in order to keep track of expenses and income while also helping detect any errors made by financial institutions.
Tracking expenses and income may seem tedious, but it is key for your business’s success. By adhering to best practices for expense tracking and income monitoring, you can improve efficiencies while cutting spending where unnecessary. By tracking finances closely you can focus on expanding your business and reaching its goals more easily than ever – best of all it doesn’t have to be difficult or time consuming either!
4. Monitor your cash flow
As a new business owner, you’ve got much on your plate to consider and manage. Effective cash management is an integral component of running any successful small business.
As part of your goal to expand and thrive, the ultimate aim of bookkeeping should be generating more cash flow than outflow. To do this, it is necessary to monitor both accounts receivable (accounts receivable) and accounts payable (accounts payable), maintaining separate bank accounts for both, tracking payments made and deposits received, as well as keeping tabs on when bills are due – otherwise late fees or additional interest may accrue or even strain relationships with lenders and vendors.
One key strategy for increasing cash flow is lowering expenses. You can do this by cutting back on unnecessary spending or shopping around for cheaper products and services. Furthermore, being aware when your inventory will run low is crucial so you can order additional supplies before running out!
Budgets, professional accountants or accounting software can all assist in accurately projecting inflows and outflows of money over time. Furthermore, creating a cash flow forecast on a regular basis allows you to compare projected results against actual performance and identify any significant discrepancies that might exist between projections and actual outcomes.
5. Pay your bills on time
Running a small business comes with numerous financial responsibilities, from setting a budget and overseeing accounts payable, to paying bills on time. Staying on top of these tasks and paying bills on time will keep late fees and interest charges from draining cash flow and placing your company in debt.
One of the main factors contributing to paying bills late is being disorganized. If you have multiple bills due throughout the month, it can be easy to forget one or more payments if they’re not all kept together and organized properly. One way of keeping them on track is setting reminders on your phone or computer so as not to forget a payment due date.
If you are having difficulty paying your bills on time, it is important to contact the company as soon as possible and discuss how best to work out an agreement that allows payments over time without incurring penalties or interest charges. Be prepared to explain your circumstances and why paying the full amount as scheduled would not be feasible in order to build credibility with creditors while maintaining good relationships. It is also important to remember that debt doesn’t always equal bad – sometimes debt can even help expand business growth!
