For many new business owners, managing finances is the last thing they want to do.
In reality, it should be at the top of your to-do list.
“The biggest mistake that puts people of out of business is poor financial habits,” says Gene Fairbrother, the lead micro-business consultant for NASE’s Business 101 program. “They don’t track income, expenses, taxes, revenue, profit or cash flow. They need to have monthly financial statements. They need to use an accounting program. And they need to crunch the numbers.”
Open separate business accounts
The first financial rule for new business owners: Don’t co-mingle your personal accounts and your business accounts.
“There is no formal IRS requirement that your business maintain a separate bank account,” says NASE National Tax Advisor Keith Hall, a certified public accountant. “However, keeping your personal activity and the activity of the business separate is critical to maintaining accurate accounting and tax records.”
Keep good records
Timely and accurate record keeping is the only way to know how your new business is performing financially.
For that reason, a shoebox is not the appropriate place to store your business receipts. You need a filing method that lets you keep all receipts in an organized fashion. If your accountant or the IRS asks you to produce a receipt to prove income or expenses, you need to be able to find that piece of paper.
A software accounting program is an excellent way to track the financial progress of your new firm. And there are dozens of reasonably priced programs to choose from. Be sure to get a program that lets you:
- Input income and expenses
- Produce reports and financial statements
- Manage accounts receivable and payable
- Create a budget for your business
Understand financial statements
The foundation of good financial habits is learning to understand the basics of financial statements. They consist of three main components:
- Balance sheet
- Income statement (also known as the profit and loss statement)
- Cash flow statement
Think of a balance sheet as a snapshot of your business’ financial position at a particular time, such as the first of every month or the end of every quarter. It shows what your company owns (assets) and what you owe (liabilities). Current assets include such items as cash reserves and accounts receivable. Current liabilities are the short-term expenses necessary to finance the operation of your business, such as payroll and accounts payable.
The income statement tells you how much money you made (or lost) during a given period of time, such as a month or quarter. It subtracts all your expenses and taxes from your revenue to show you your net income.
The cash flow statement ties the balance sheet and income statement together. It shows the changes in your balance sheet from the beginning to the end of the period being measured, such as a month or a year. The cash flow statement shows how and when your business produced inventory, made sales and received payments.
Be vigilant with cash flow
Cash flow is the life blood of a small business.
If you make hundreds of sales to customers, but you don’t collect the money you’re owed for those sales, then you have no cash. And you need cash to pay business expenses.
You can (and should) take steps to optimize your cash flow. Try these:
- Bill customers as soon as possible (such as when you deliver a product or complete a project)
- Develop strict payment policies (such as, “payment due within 30 days”)
- Make your customers aware of your payment policies
- If a payment becomes overdue (even by one day), contact the customer
The NASE can help
These NASE articles can help you learn more about good financial habits for small-business owners: To print, click here to download the full Startup Kit.