Money is a tricky yet crucial factor to monitor, especially when it comes to business. While anyone can be an entrepreneur, it takes years of studying and practice to master the art of financial management.
Fortunately, these days, you can invest in specialized software to make the process more convenient. You can also enlist the help of professionals to help you with the day-to-day operations of your company. For instance, if you’re in the UK, you can hire London accountants to stay on top of your growing business.
Nonetheless, you must equip yourself with the fundamentals of accounting so that you can manage your finances well and make better decisions about your company’s future. Here are a few tips that can help you:
1. Separate Your Personal And Business Finances
Right at the start of your venture, you must clarify the distinction between your personal and business finances. As a small business owner, it seems more convenient to use one account for all your money. However, this can lead to organizational and tax problems, especially as your company grows.
This is why the first thing you should do is to have a separate account for your personal and business expenses. You can also apply for two credit lines to ensure that your corporate debt won’t affect your personal credit rating.
2. Understand The Basics
Business accounting and payment processing are essential skills that small business owners should have. While you don’t need to become an expert on these areas, you must be able to navigate your way around the fundamentals of the field.
For instance, you should know the basic terms, such as gross revenue, expenses, net profit, cash flow, and breakeven point. You’ll be using these words in your conversations and reports, so it pays to understand what they mean.
Moreover, speaking of reports, accounting entails lots of paperwork. You should also be familiar with the important business accounting documents, such as:
- Balance Sheet – This file presents an overview of your company’s financial standing at a given moment. It includes the assets, liabilities, and equity that your enterprise holds. It’s valuable for calculating your business’s net worth.
- Income Statement – Also known as a profit-and-loss statement, this document provides a summary of your revenues and expenses for the year. It’s useful for measuring the profitability of your venture using an Excel or a Google Sheets Profit and Loss template you can get online.
- Cash Flow Statement – This one helps you monitor the amount of money that went in and out of your company for a given period, which is usually within a month or financial quarter.
- Revenue Forecast – Revenue forecast is a crucial report that contains your predictions for the upcoming year about the potential income that your company can earn. If you have shareholders, you’ll need to be familiar with creating this document.
3. Keep Track Of Cash Flow
As mentioned above, cash flow pertains to the money that enters and exits your business. Inflow is sourced from selling your merchandise and receiving payments from your customers. On the other hand, outflow comes from purchasing stocks for your inventory, payroll, marketing expenses, as well as overhead costs.
The ideal scenario would be that your inflow would be greater than your outflow. However, as you well know, business isn’t that straightforward, unless you’re in retail, where you sell the product and get the cash immediately.
For business-to-business (B2B) companies, most clients don’t pay right away. Payments have to be processed by several departments on their end first due to the substantial amount that needs to be disbursed.
This would mean that you may be running on a negative since you’ve already provided the customer with your product or service, but you haven’t been compensated for it. That’s why you have to keep track of your cash flow to ensure that you aren’t spending money that you haven’t earned yet.
4. Consider Spreading Out Tax Payments
Sometimes, lump tax payments aren’t practical because they entail a large amount of money at once, which can negatively affect your cash flow. Instead, you can opt to view tax as a monthly expense so that you can budget for it better.
Talk to your accounting team about how you can ensure compliance for tax and other government requirements. Check this video to learn more about the things that your accountant can help you with: https://www.youtube.com/watch?v=GbeJ036CWXg&t=1s.
5. Prioritize Having A Cash Reserve
Similar to personal finances, making your savings liquid is useful for times of emergencies. Create a bank account for your business and treat it as a cash reserve that you can easily withdraw when needed.
Managing your finances doesn’t need to be overwhelming. Follow these tips to ensure that you can monitor and regulate the cash flow of your business.