The success of your small business relies on the strength of your financial management. Quality financial management can help your small business attain profitability, make projections, and set and reach goals.
Analyzing financial reports can help you determine what you can afford, for example, in inventory and in hiring new employees. Proper bookkeeping can help you prepare for loans and increase the chances you will succeed in acquiring additional funding if needed.
The four most important steps to starting your business on the road to financial management are:
1. Select and Set Up Accounting Software
2. Establish Budget and Review Monthly
3. Perform Accurate and Timely Bookkeeping
4. Review and Analyze Financial Statements
Select and Set Up Accounting Software
Questions you should ask yourself when choosing Accounting Software for your business:
● Do you want your software to be computer or cloud-based?
● Do you need your software to run payroll?
● Do you need your software to grow as your business grows?
● What are the standard software products used in your industry?
● What software does your CPA recommend?
● What is your budget for software?
Establish Budget and Review Monthly
Once you have selected and set up accounting software for your small business, the next step is to establish a monthly budget. A methodized budget will help you track expenses, plan for the future, economize when necessary, and make a profit.
Review budgets monthly to compare actual revenue and expenditures.
Perform Accurate and Timely Bookkeeping
Recording your small business’ financial data on a timely basis will help you make better business decisions, determine when you might need additional financing (and help you get that financing), decide on owner’s draw, and plan for retirement.
Record financial information every day or every other day to reduce errors.
Here are some do’s and don’ts for accurate bookkeeping:
● Record daily receipts and expenses – including sales tax.
● Deposit all sales.
● Do not spend cash sales.
● Pay expenses with a business checking account.
● Avoid using a petty cash system.
● Review both payable and receivable accounts weekly.
● Run payroll bi-monthly.
● Pay yourself with owner’s draw.
● Run sales tax report each month and remit taxes.
● Run Profit/Loss (P/L) statement each month.
● Run the balance sheet each month.
● Reconcile your bank accounts each month.
● Review your budget to actual spending each month.
Review and Analyze Financial Statements
Accounting is the analysis of the bookkeeping work you have done. Just looking at your business’ checking account balance is not a good indication of how your business is doing.
Three reports will help you to determine the financial status of your small business:
1. Profit/Loss (P/L) or Income Statement
2. Balance Sheet
3. Cash Flow Projections
When you have accurate financial information for your business, you will know if you can pay your bills on a timely basis, whether it’s appropriate to make a large investment in your business, or whether you need to adjust your cash flow.
Following these four financial management steps can mean the difference between failure and success for a small business.
For more information on any of these steps, please see the Northern Initiatives financial management training video below: