Small Business Finance Guide for Business Owners

Successful business owners make time to review their business’s books regularly. Even if you’ve tasked another person to handle daily, weekly and monthly accounting tasks, it’s good to know how your business is doing financially from day-to-day. It can be difficult to find room on your to-do list for this task. Use these tips to help you stay on top of your business finances.

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Why it’s important to stay on top of small business finances

Staying on top of your financial progress can help you in many important ways. You’ll discover strategies to get your invoicing down, keep your income and expenses up to date, follow up with your customers and create a bad debt reserve. A bad debt reserve is the dollar amount of receivables that a company does not expect to actually collect. This includes business payments due and loan repayments.

Financial definitions to know

Gross Revenue

Gross revenue is the total amount of sales for a reporting period, prior to any deductions.

To calculate gross revenue for a product, multiply the items sold by the price of the item. To find gross revenue of a company that sells a variety of products, repeat that step for each product.

Gross revenue indicates the ability of a business to sell goods and services, but not its ability to generate a profit. Sales discounts and sales returns are deducted from gross revenue.

Expenses

According to the Small Business Administration (SBA) , business expenses are the cost of conducting a trade or business. These expenses are usually tax deductible if your business is for-profit. Rent, business travel and paying employees are all deductible business expenses. For a list of deductible expenses allowed when filing taxes, visit the IRS website: Deducting Business Expenses.

Net Profit

Net profit is the profit of a company after operating expenses and all other charges including taxes, interest and depreciation have been deducted from total revenue. Net profit is also called net earnings or net income.
The Investing Answers website has a net profit calculation example.

Cash Flow

Cash flow is the money moving (flowing) in and out of your business monthly. Cash flows in from customers or clients buying your products or services. Cash flows out to cover expenses.

Lack of healthy cash flow into your business will shut you down faster than anything else. As a matter of fact, 82% percent of businesses fail due to poor cash flow management skills/poor understanding of cash flow.

The SBA has a helpful template to help you calculate cash flow here: A Simple Cash Flow Spreadsheet Anybody Can Use. For more information, visit this SmartBiz University module: Analyzing Cash Flow.

Balance Sheet

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, liabilities and owners' equity.

Visit the QuickBooks blog for in-depth information: The Business Owner’s Guide to Balance Sheets (and a Free Template).

Income Statement

An income statement is also called a profit and loss (P&L) statement. Investopedia gives an easy-to-understand outline here:

An income statement is a financial statement that reports a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period.

Unlike the balance sheet, which covers one moment in time, the income statement provides performance information about a specific time period. To help prepare this important document, review this post from the SmartBiz blog: How to Prepare an Income Statement.

Revenue Forecast

A revenue forecast is a prediction for the upcoming year about how much money your business will likely bring in from the sale of your goods or services. It’s important so you can estimate the expenses you can afford and your profit margin. AccountingDepartment.com has an easy-to-digest article: 3 Ways to Forecast Your Revenue.

Entrepreneur recommends two ways to look at revenue forecasting: An optimistic approach and a more conservative estimate.

Want a deeper dive into financial terminology important for a small business? Check out our Glossary of Terms for Small Business Owners.

What You Need for Tax Time

It’s no surprise – small business owners are responsible for paying taxes on all income generated by their business. Even if your business didn’t generate income during the year, you have to report that to the IRS as well.

The documents you need to produce to file your business taxes depend on the structure of your business. H&R Block has a helpful list here: Small Business Tax Prep Check List.

If you’re not sure whether to do your own taxes, take a look at this post to hear from real small business owners: Small Business Taxes: Self-File or Use a Professional? Time, cost and complexity are all elements you should consider when deciding to DIY or not.

In 2021, this will be especially important if you received emergency funding from the government. Check with your tax preparer or the IRS website for specifics.

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Small business accounting tips

1. Keep personal and business expenses separate

A big financial mistake is to use your personal checking account for business expenses. Doing so may seem simple at first, but over time it complicates things. It makes it difficult to separate out which expenses are which, and you need to know your business expenses so you can properly file your taxes.

If you’re ever audited by the IRS, having your expenses combined will create a logistical nightmare.

To avoid headaches, open a business checking account. In addition to helping out at tax time, this step can help you build strong business credit as well. Check out this blog post for more in-depth information about business credit cards: Six Benefits of a Business Credit Card.

2. Track all business expenses

This important step helps you monitor business growth and determine what expenses you need to report on your tax return. You should track the following:

  • Meals and entertainment
  • Out of town business travel
  • Vehicle related expenses
  • Gift receipts
  • Home office receipts

If you haven’t done so already, there are countless benefits to tracking expenses by making your business paperless. “Shoebox Accounting” aka throwing everything in a box and sorting it out later, can be confusing and a huge time waster. Create digital records of receipts and important documents. Here are a few tools to help you go paperless:

3. Stick to a budget

It’s simple mathematics yet 29% of businesses fail because they run out of cash. A business budget takes time and effort to set up but it’s key to running a profitable small business. Fortunately, there are many resources to make the process faster and easier than you thought possible. Check out Small Business Budget Templates for Download.

4. Prepare for the unexpected

Unforeseen expenses can come up for even the most organized business owner. No matter if you’re just starting out or have been around for years, you must be prepared. Here are a few types of unexpected business expenses you might face.

  • Equipment and Technology
  • Employee Costs
  • Legal fees
  • Shrinkage (caused by employee theft, shoplifting or administrative errors).

Be sure to regularly contribute to a business savings account by building it into your budget.

5. Consider hiring a professional

Finally, if you’re struggling to keep all of your financial balls in the air, consider bringing in reinforcements.
Uber-successful businessman Richard Branson says, “If you really want to grow as an entrepreneur, you’ve got to learn to delegate”.

Accounting is that one area where delegation is essential. You might be losing money without a solid professional in place. If you’ve decided to forgo DIY and hire a professional, review this post on the SmartBiz Small Business Blog How to Hire an Accountant for Your Small Business.

Bookkeeping vs. Accounting

It’s important to know the difference between bookkeeping and accounting so you can know whether to DIY or hire a professional.

What is Bookkeeping?

This strategy sets up the foundation for accountants, tracking your finances by recording transactions. This gives you a holistic view of your business so you can easily see the amount of money coming into and leaving your business. Bookkeepers are tax compliant so you can avoid penalties and fees from the IRS

Here are six common bookkeeping tasks:

  • Recording income from services and expenses like rent, utilities and office supplies.
  • Some bookkeepers manage payroll.
  • Depending on your needs, some bookkeepers create invoices and make payments.
  • Comparing the balances in your books against bank transactions to see if they match. If not, they make adjustments and create bank reconciliation statements to record these discrepancies.
  • Tracking money owed (accounts payable) and money owed to you (account receivable)
  • Bookkeepers follow up on late payments.
  • Maintaining the general ledger that has a record of all financial transactions. The general ledger typically uses the double-entry accounting method, meaning for every debit on one account there’s a corresponding credit on another.

What is accounting?

Here are four accountant responsibilities. They use the financial data to offer detailed insights and guide smart business decisions.

  • Preparing financial statements: This helps you assess the overall financial health of your business including:
    • Balance sheets: A snapshot of your financial situation at a point in time, calculated through this formula: Assets = Equity – Liabilities. Find additional details on the SmartBiz Small Business Blog: How to Create a Balance Sheet for Your Business.
    • Income statements: A record of all your income and expenses over a period of time. More information here: How to Prepare an Income Statement.
    • Cash flow statement: A record of cash flowing in and out of your business for a period of time. For an overview of cash flow analyzation, review this article from SmartBiz University: Analyzing Cash Flow.
  • Analyzing journals and ledger entries, and making adjustments, and identifying any incurred expenses that have not yet been recorded
  • Providing tax advice, completing and filing tax returns
  • Offering financial advice and helping understand the consequences of your financial decisions

Bookkeeper credentials

Bookkeepers aren’t required to have specific education but should be very accurate and familiar with key financial topics. If you’re hiring a bookkeeper, it’s a good idea to hire one familiar with small business operations.

Accountant credentials

Generally, if you want to practice as an accountant, you must have a bachelor’s degree in accounting or another finance degree. Accountants can be awarded additional professional certifications like Certified Public Accountant (CPA). Learn more here from the Crush the CPA Exam blog: Top 5 Best Accounting Certifications.

What are the differences between bookkeeping and accounting?

Accountants are qualified to handle the entire business accounting process, while bookkeepers handle recording financial transactions. For accuracy, accountants often advise bookkeepers and review their work. Bookkeepers take care of financial transactions so accountants can analyze the data.

Similarities between bookkeeping and accounting

Because they both work in the financial space, bookkeepers and accountants share some similarities.

  • Both work with financial data
  • Common goal of improving the financial situation of the business shared.
  • Accounting knowledge required
  • Roles can overlap in small business
  • Both are tax compliant

Create and continuously update your financial plan

A financial plan is part of the original business plan you created when starting out. It keeps you on track and helps determine opportunities for expansion or cutting back. It also helps lenders determine if lending you money is a wise use of their funds and can indicate the net worth of your business at the end of a certain time period.

If you don’t have a business plan yet, SmartBiz Loans can help. Review The Ultimate Guide on How to Start a Business Plan.

The Bottom Line

Getting a handle on your finances should be the first order of business for an entrepreneur. The SmartBiz Blog has a handy article with steps you can take to keep your business financially healthy: 6 Financial Habits of Successful Small Business Owners.

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