Financial Management Tips for Small Business
The skills, tools and tech you’ll need to power business success and stay organized
“Every time someone starts a small business, it’s an act of hope.” Inspiring words from the State of the Union address last month. If you’re reading this, it’s because you are, or are looking to become an entrepreneur, and for that we thank you. Why? Because starting a small business benefits everyone. How? U.S. economic growth comes from the new jobs created by SMBs (that’s you!). However, you don’t need us to tell you how hard it is to start a new business. The U.S. Bureau of Labor Statistics reports that two out of three businesses (with employees) will last two years. About half will last five years. With these kinds of stakes, you need to do all you can to ensure your business will survive. Good financial management is the foundation of every successful business.
In this article, we’ll drill down into the know-how, tools and tech you’ll need to streamline the finances of your new business. We’ll explore financial management options for your business and tips for making sure you are tracking all of the expenses and tax write-offs you are allowed. So open up a fresh Excel or Google Sheet, and start tapping in some notes.
Management Accounting vs. Financial Accounting
Let’s talk accounting. You may already have an accountant, but it’s important that you understand some key financial concepts. We’re going to define two important terms that you need to become familiar with, and the distinctions between them.
Management Accounting provides the financial information for an organization’s internal management to inform decision-making and improve performance. Put simply, management accounting gives you the financial information required to operate your business. This information includes income sources and expenses. Harnessing processes and technology to track these consistently will help you better understand the operation of your business.
Financial Accounting is the process of preparing financial statements for companies to demonstrate their financial performance to people outside of their company – such as investors, board members, etc. Financial accounting is most often completed by a bookkeeper or an accountant. Reconciliation between your bank account statements and the monthly transactions are a part of this process.
Evolution Financial Coaching believes that every business owner needs to have some level of management accounting knowledge of their business – especially in the startup phase. It’s important to understand what your expenses will be to operate your business, including profit or the salary you would like to earn - so you can determine how much income will be needed to support the operations. We call this “starting with the end in mind”.
What do I need to do financially speaking?
In the context of this article, let’s assume you have a sole proprietorship or an LLC. Your first action (and best practice) is to separate the financials by opening a separate checking account and obtaining a credit card to use solely for the business. By keeping the finances of your business separate from your personal accounts you’ll be able to more easily view your income and expenses associated with the operation of the business. If you are using a different registered name for your business you’ll want to set up these accounts in the name of the business. Ensure all of your expenses are paid for with either the credit card or via the checking account for the business.
Understanding tax write-offs - one of the fun(?) things about taxes
A tax write-off is any legitimate expense that can be tied to the business you are operating. Put another way, tax write-offs are expenses that lower your taxable income on your tax return. Why might you want to decrease your income? Because you only pay taxes on the total income minus the expenses.
Expense example: If you use your cell phone, require internet/computer, drive your personally-owned vehicle, buy office supplies, business cards, etc. – you need to track and report these expenses on your taxes.
Understanding your operational expenses will help you know how much it takes to operate the business on an ongoing basis.
Tools and tech: How do I track all the expenses and income?
Shoe boxes are great for storing power cords or pictures, but not the best repository for your business records and they can’t help you track income and expenses. Digital data management is a critical component of running a successful business. Electronic data tools let you manage, backup and protect your important financial information. You can start simple, and advance to something more sophisticated as your business evolves. Here are some easy technology options to get you started:
Excel / Google Sheet / Smartsheet: If you have just a few expenses every month, spreadsheets are excellent tools to use for organizing your information and frequently used by new business owners. You can set up a basic income and expense tracking tool in minutes.
Accounting Software: If your business has a lot of transactions - and you prefer using software -, there are a range of easy-to-use, basic accounting platforms that are inexpensive, or offer free trials i.e. FreshBooks or Wave.
Both options are great for small businesses, the most important thing is to select one and get started. If you need help determining which is best for your business, we’re happy to help you.
Bookkeeping basics: How to get started
This part can feel intimidating or onerous, but it doesn’t have to. Let’s take the stress out of this equation and explore the steps you will take based on the tool you selected.
Tool: Spreadsheets
Step 1: List all the income sources. For this example, let’s use real estate. The income source is likely rent from one, or more tenants at a property you own.
Step 2: Now list all the expenses you pay monthly, quarterly and annually that are related to this property. In our real estate example, you may have expenses like a mortgage, property taxes, insurance, utilities (water, electric, sewer, snow removal,etc.)
You’ll also need to account for technology expenses, i.e. internet, computer and software subscriptions (Excel or Smartsheet).
💡Pro Tip: Group the expenses together with similar items – for instance technology category might include: computer hardware, internet, software, apps, etc.
Step 3: Consider the expenses that are associated with your residence, i.e. a home office, etc. You’ll need to add these to your expense list. If these expenses are exclusively for your business, ensure they are paid from the business account.
Step 4: Update the Excel or Google Sheet every month with all the expenses and income from your checking and credit card statements. This will ensure you are staying on top of the expenses, and an added bonus: you will be ready for tax time.
Accounting Software:
Step 1: Set up your chart of accounts – basically the income and expense categories we discussed earlier in the spreadsheet section.
Step 2: Now, electronically connect your accounts so that all transactions flow automatically into the software. This is an efficiency bonus with using a software tool – a lot of my clients use Wave as a free tool.
Step 3: Review the transactions on a weekly basis in real time, to ensure they are categorized correctly using the chart of accounts established in Step 1.
Stop the paper chase - painless ways to manage all those receipts
Shoe box jokes aside (we won’t judge), whichever method of receipt management you choose, it’s important to maintain a record of your business receipts. Here are some document management options to consider:
File folders: Keep your paper receipts in simple file folders. If you have just a few receipts, you can use one folder per year, quarter or month. Order them chronologically with the older receipts in the back.
Email: Create electronic folders (year, quarter, month) to manage receipts you receive via email. As they’re already time-stamped, they’ll automatically be in date order.
Electronic: If you’re using an app or software platform, you can scan the receipt and attach it directly to the transaction so that you have it readily available if/when needed.
Get and stay organized
Financial management is vital to your business’ health and future success. We know that starting the process can be daunting, but we promise you - getting organized will save time and reduce stress – while increasing your confidence. By establishing the organizational processes we discussed in this article - whether it’s a spreadsheet, app or software tool, you will have a centralized place to house all the data for your business and be able to immediately access the information you need for your business’ income and expenses.
In our upcoming article, we’ll delve into how to derive insights from this data including the key performance indicators (KPIs) or success metrics you need to track. This is actually fun!
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