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Ask any small business owner their recipe for success and they’ll likely tell you it requires a combination of passion, drive, and unrelenting dedication. That’s not the whole story, though. Building and maintaining a strong, long-lasting company also relies heavily on the concepts of financial management, budgeting, bookkeeping, and taxes.
Protecting your investment means paying proper attention to financial details. Not only will efficient practices help promote your profit, but your diligence can also protect you and your staff from compliance issues and legal trouble. Those habits can also provide an important financial safety net during tough stretches for your operation, such as an economic downturn.
Understanding the basic concepts of small business finance is an important step in securing your company's future. These fundamentals provide a necessary foundation for any business looking to grow.
Financial management: vital to your bottom line
For-profit businesses must monitor their cash flow, expenses, and revenue closely to maximize earnings, grow, expand, and hire more help. In the event of an audit or inquiry, non-profit businesses must properly oversee donations, grant dollars, and all other sources of income.
Failing to understand these basic financial measures comes with some consequences. If your small business has investors, then you’re accountable for supplying them with any requested financial records as an owner or manager. Additionally, mismanaging your money creates cash flow problems that can lead to vendor/supply-chain interruptions or delays in acquiring inventory.
Best practices for the business owner
Financial management is not necessarily difficult; it just requires diligence and commitment. These are some measures to help secure long-term financial success:
1. Start with a workable budget.
A budget helps account for every penny that comes in and out of your business. To get started, make a list of all your expected monthly income sources, including sales, interest on investments, rental property income, etc. Income information can be gathered from your profit and loss statement, discussed in further detail below.
Then, make a separate list of the expenses you expect your business to incur on a regular basis. Those costs may include inventory purchases, payroll, insurance premiums, taxes, utilities, fees, and payments on debts (to name a few).
2. Educate yourself on bookkeeping techniques.
Bookkeeping is a method by which an owner keeps track of all financial transactions conducted by the business within a period (often monthly). You can opt to bookkeep the old-fashioned way with a pencil and a ledger book. You also have the option of cloud-based bookkeeping through tools, many of which are available at low or no cost. Some small businesses also opt to outsource this task to a trained bookkeeper who may work as a contractor or part-time employee.
3. Understand cash flow.
Understanding where your money goes is an integral piece of financial management.
A cash flow statement covers a specified period of time and accounts for the amount of cash spent and for what purpose. It helps avoid unnecessary bank account overdrafts, overspending, and liquid asset hemorrhaging. Like a business budget, cash flow worksheets are readily available online.
4. Put together a profit & loss statement.
A profit and loss statement examines the overall business revenue, profits, and losses within a certain period of time (quarterly or annually, for example). The statement is important for the purposes of obtaining working capital or seeking a business loan. It is also important for businesses with investors or shareholders, as it provides a full financial picture. Be sure to keep this updated regularly so it is ready if requested. Workable templates are available at low or no cost.
5. Update your balance sheet.
A balance sheet tracks a business’s assets, liabilities, and equity. It is also important to keep the document updated, and the general goal is to balance assets equally against liabilities plus equity. This document is important to lenders and investors, so be sure to make regular entries as your financial picture changes.
6. Start forecasting.
Are you expecting sunny skies ahead? Forecasting your financial picture is key to meeting goals, determining whether it’s time to take out a loan, or deciding it may be time to reduce expenses. There are a couple of different ways to prepare a revenue forecast. Working with a trustworthy, experienced professional to get the hang of this technique may be necessary for the first few years.
7. Ensure financial document readiness.
Keeping documents like tax records, receipts, and financial reports organized and accessible ensures you’re always prepared for audits, tax filing, or investor queries. Create a filing system, physical or digital, to easily retrieve records when needed.
8. Establish a routine for financial reviews.
Set a monthly or quarterly schedule to review your financials. Regular financial reviews, particularly of income and expense reports, provide clarity on how funds are being utilized and help you identify areas for improvement. This habit promotes good financial health and allows you to stay on top of your business’s performance.
9. Create a tax planning strategy.
Work with a tax advisor to develop a tax strategy suited to your business. Consider implementing practices like quarterly estimated tax payments or investing in deductible expenses before year-end. A proactive approach to taxes can prevent surprises and make tax season easier.
Tips for success
When it comes to financial management, your to-do list can quickly seem overwhelming. These best practices can help you maximize organization, efficiency, and compliance.
- Obtain a Tax ID: In many cases, a small business will need to assume its own individual identity, starting with the assignment of an employer identification number (EIN). The EIN can be easily obtained from the IRS, and the forms can be filled out online.
- Checking the boxes: All business funds should be kept completely separate from personal funds. Once you receive your EIN, use it to open a commercial checking account at a bank with which you are comfortable.
- Payroll: If your business has employees, you must be very diligent in properly setting up payroll. Accounting software can help with this, and you should consider putting together an employee handbook to keep workplace conflict at a minimum (including policies relating to paid time off, bonuses, etc.).
Your state/local jurisdiction may also have additional start-up requirements for you to follow, such as obtaining a business license or submitting to inspection. Be sure to check on these policies, or your business could incur fines and penalties.
For more information
For more information to help your small business, check out the BBB business news feed and the BizHQ.
BBB Great West + Pacific contributed to this article.