Entrepreneurs are not always financial professionals. But it’s no secret that financial management is the key to business success. Here’s a guide to help you understand what the financial management of a small business entails along with tools and information you need to put a solid system in place.
Key Financial Business Terms
Gross revenue is the total amount of sales recognized for a reporting period, prior to any deductions. This figure indicates the ability of a business to sell goods and services, but not its ability to generate a profit. Deductions from gross revenue include sales discounts and sales returns.
Section 162 of the Internal Revenue Code defines a business expense as any expense that is “ordinary and necessary” when running a business or trade. These may include accounting or bank fees, marketing and advertising expenses, wages paid to contract employees, insurance costs, utilities, office space rent, and more. For a list of tax deductible expenses, visit the IRS website here.
The difference between revenue and total business expenses is known as net profit. Net profit is one of the most important indicators of a company's financial health. By tracking increases and decreases, a business owner can determine if current strategies are working and can forecast profits based on revenues.
Cash flow is the net amount of cash and cash-equivalents moving into and out of a business. Calculating cash flow shows how liquid a company is and indicates if the company will remain in the black. Download a free cash flow statement template from QuickBooks here. For help analyzing cash flow, review this article from SmartBiz University: Analyzing Cash Flow.
Must-have Business Accounting Documents
A balance sheet is a snapshot of the financial condition of a business at a specific moment in time, usually at the close of an accounting period. A balance sheet comprises assets and liabilities. An asset is anything the business owns that has monetary value. Liabilities are the claims of creditors against the assets of the business. For a complete explanation of balance sheets and a free templet, visit the QuickBooks blog here.
An income statement, otherwise known as a profit and loss statement, is a summary of a company’s profit or loss during any one given period of time (such as a month, three months, or one year). The income statement records all revenues for a business during this given period, as well as the operating expenses for the business.
Cash flow statement
Cash flow is king when you’re running a business! A cash flow statement is a financial document that lists the cash that moves in and out of a company’s accounts. The basic formula is simple: cash in minus cash out. Find out what this equation reveals about your small business by visiting SmartBiz University, where we’ve covered all the key steps to analyzing cash flow.
Revenue forecast is a calculation of the amount of money that a company will receive from sales during a particular period. Can you afford to increase marketing or add staff? How much of a payment can you handle if you take out a business loan? As a business owner, you'll likely ask hundreds of similar questions. You can't answer accurately without revenue forecasting. Check out this article from Entrepreneur for more details: How to Forecast Revenue and Growth.
The Importance of Budgeting
If you’ve never created a budget while managing your business finances or don’t yet understand why it’s such a helpful business tactic, here are some reasons why you should regularly create and reassess business budgets:
- Budgeting helps track your business spending: When it comes to effectively managing your money, budgeting is crucial for knowing not only where your money is going but where it’s coming from. Put another way, budgeting enables you to visualize your income and expenses so you can better comprehend your small business finances. Once you can see the details, you can better organize your thinking and come up with a business plan based on your financial statements. You may even be surprised to see what you’ve been spending on and ask yourself the question, “Does my business really need this?”
- Saves money by cutting back on unnecessary costs: As a small business owner, when you visualize your spending habits, you might decide to make some changes in how you spend money. When you budget, you prioritize certain needs and cut back on unnecessary spending, and by eliminating non-essential costs, you increase the amount of money that you save. You may also start to feel financially accountable when you have a budget to reference, thus making you more aware of and cautious about your spending.
- Helps you avoid or control your debt: A thorough budget can help you avoid the pitfalls of impulse purchases that cause your company to spend more money than it actually has. When you’re careful with spending and keep a close eye on financial statements, you’re more likely to be in a better position to get out of debt or avoid it entirely.
- Achieve your goals by staying on track and focused: Budgeting sets boundaries on your small business finances, and having these boundaries means that you won’t spend beyond your means. Additionally, strategizing and sticking to your plan keeps your spending disciplined and your finances on track to reach your most important goals. Having something to work toward and creating a budget to match it makes hitting your savings or profit goals that much easier.
Budgeting allows you to concentrate on cash flow, cost reduction strategies, profit improvement and increasing ROI. It helps with both planning and control of the finances of the business. The SmartBiz Blog has resources to help get you started: Small Business Budget Templates for Download.
It takes money to make money, so the saying goes. Securing low-cost funds for your business can take you to the next level. It may seem counter intuitive to take on debt. But the right loan at the right time can help you expand and save money. For examples from real SmartBiz customers, review Determining Use of Proceeds from SmartBiz University. Below are a few ways funds can boost your business.
- Provide working capital
- Pay off existing high interest debt
- Purchase inventory or adding products and services
- Refinance or purchase commercial real estate
SmartBiz marketplace banks offer low-cost SBA Loans as well as Bank Term loans for small businesses who may not qualify for an SBA loan immediately or want funds faster than our streamlined SBA process provides. SmartBiz facilitates flexible financing options with one easy application process that matches you with the bank most likely to fund your loan. SmartBiz gets you to a “yes” quickly.
Use our secure software to pre-qualify in less than 5 minutes without impacting your credit score*. Get funds as fast as 7 days after your application is complete. Apply now here.
* SmartBiz conducts a soft credit pull that will not affect your credit score. However, in processing your loan application the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.
Helpful Accounting Software Options
Shoebox accounting (tossing everything together and sorting it out later) can cripple your company. These days, small businesses need an accounting system that’s cost effective, up-to-date and can handle all financial tasks you need to run your company. If you’re not happy with your current system or need to establish one, consider one of these free accounting software systems:
- GnuCash is a great fit for a business in need of organized and easy bookkeeping. The software has features like invoice management, accounts payable and receivable along with expense tracking and payroll. Download GnuCash here.
- CloudBooks is a cloud-based accounting solution designed for small businesses and freelancers. It includes features for billing, invoice creation, project management and time tracking. CloudBooks is only free for 30 days then it’s priced at just $10 per month.
- If you’re a sole proprietor or run a small business, Wave might be the best fit for you. It's 100% free for accounting, invoicing and receipts. There’s no payroll features and you’ll have to pay if you need personal technical support. Download the Wave app here.
- SlickPie is free accounting software for start-up or micro businesses. The website sums up the SlickPie mission: “Developed to provide small business owners with a simple and intuitive accounting experience that users can pick up and use right away; no headaches.”
- QuickBooks Online is a cloud-based accounting software for small businesses. It offers solutions for managing sales, expenses, cash flow, and more. FitSmallBusiness has QuickBooks information to help you learn the program and handle your finances easily and quickly.
Getting your financial systems and processes in place can seem overwhelming. If you need help, consider hiring a financial professional. Review this article from the Xero blog for tips to help you find the right fit: When you should hire an accountant. For in-depth information about business finances and financing a small business, visit SmartBiz University or the SmartBiz Small Business Blog.