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Guide to Small Business Financial Management

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Guide to Small Business Financial Management

Small business owners have many skills. Some are graphic design whizzes, while others make exquisite, handcrafted furniture. Some bake custom-made cupcakes, while others consult on developing healthy and diverse corporate cultures. What these skilled, dedicated individuals often need to improve, however, are their small business financial management skills. Few people think, “I’m going to start a business selling artisan bread, but first, I’d better fully understand the intricacies of business accounting.”

The success of a small business often hinges on financial management. Many small businesses can’t afford a certified accountant, at least in the early days of their business, so the responsibility for managing payroll, making quarterly tax payments, and tracking invoices fall to the business owner. Small business accounting software is a huge help, but you still need to understand the basics of financial management. With that in mind, here’s a guide to the financial management skills you’ll need to develop.

How to manage your cash flow

Approximately 20% of small businesses fail in their first year, with 29% citing a lack of cash as the reason for failure. No matter how well you think you’re doing, your business can quickly get into trouble if you don’t manage your cash flow.

Managing cash flow means understanding when money comes in, which expenses need paying, and which clients have yet to pay for your services. With this information, you can identify and resolve potential income issues. To probably manage your cash flow, you need to do the following:

Create a cash flow statement

A cash flow statement is a simple financial document that tracks income and expenditures, allowing you to predict future cash flow based on past performance. Most small business accounting software will come with a cash flow template. Use your cash flow statement to track sales income, rent, utilities, unpaid customer invoices, payroll, and other financial data.

Track your expenses and profits

Small business expenses include everything from rent and utilities to the coffee in your break room. Use accounting software to categorize expenses and keep track of receipts for later use when filing taxes. Understanding your expenses helps you identify areas that need additional resources or where corners can be cut to save money.

Tracking income helps you compare profit and loss and evaluate your overall profitability. You’ll need to create a profit and loss statement that includes the following:

  • Business revenues
  • Expenses
  • Costs over a specified period (often one month to a year)

Your profit and loss statement provides an overview of where you need to adjust your spending, prices, and business operations. Your profit and loss statement information will be needed come tax season.

Set your payment terms

Late payments frustrate many small businesses and can seriously impact your cash flow. Many businesses, such as restaurants and retail, take immediate payment for goods and services. Others offer credit, allowing the customer to buy now and pay later. Credit is a double-edged sword for many small businesses, as it can attract new customers, but you have to wait to receive payment — a potential problem for new businesses with tight monthly cash flow statements. Charging interest on late payments or offering discounts for early payments can encourage people to pay their bills, but for many small businesses, cash-on-receipt is the simpler option.

Paying yourself

Keeping your business finances separate from your personal finances prevents confusion and clearly differentiates the business as a separate entity. Pay yourself a set monthly wage, and use the remaining money to cover business expenses.

Arrange business credit

Cash flow comes in two varieties: positive and negative. Positive cash flow means your profits exceed your expenditures, and everything is right in the world. Negative cash flow means the opposite; you’re not making enough to cover business expenses. Most small businesses will run into periods of negative cash flow as they work towards a more stable, positive financial state. Business credit makes navigating periods of negative cash flow much more manageable.

Small business credit may be secured using business credit cards, small business loans, or lines of credit from financial institutions. Most often, business assets stand as collateral for credit. Remember to set up spending limits so you don’t overextend your ability to pay back the credit, keep an eye on fees and interest rates, and track credit purchases and payments with accounting software.

Start a rainy day fund

Setting up a fund for negative cash periods may not be possible in the early days of your business when cash is tight, but it is an excellent option for the future. Putting away a set amount of money every month helps mitigate the costs of purchasing new equipment, hiring a new employee, or simply weathering a period of low profits.

Make monthly tax payments

The IRS requires businesses to make quarterly estimated tax payments, which can push a small business into negative profits at the end of each quarter. Making monthly payments on your taxes spreads the costs over the entire year, making each payment a regular part of your monthly budget instead of a lump sum.

Use small business accounting software

Small business financial management is challenging without help. Accounting software takes much of the heavy lifting off your hands by automating financial processes, taking care of payroll, and generating financial reports. Most accounting software includes templates for financial documents, including cash flow statements, profit and loss statements, and budgets. You can also use small business taxation software to file taxes and calculate deductions.

With some preparation and the right accounting software, small business financial management is a straightforward process. While you may require the services of an accountant as your business grows, you can handle it yourself as you launch your new business. The key is to start the business with a sound accounting system and keep your finances current monthly. Do so, and your business will have a greater chance of long-term success.

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