A Guide for Small Business Financial Management

Operating a small business is all about money management. Being in the dark about your company’s finances is a recipe for disaster. It is critical to stay in control of your budget, financial goals, and accounting services if you wish to stay in business. Learning the basics of small business financial management should be one of the first steps you take as a budding entrepreneur. Get your startup off the ground with smart money management, starting with this guide from the experts at Diversified Management Services, Inc.

Why Is Financial Management Important?

Many small business owners are not accountants. They are creative thinkers and entrepreneurs who may not have a background in money management. If this sounds like you, it is important to understand the value of at least basic financial knowledge. If you do not know the basics, you are missing vital insights into how your business is doing. To successfully grow your business over time, you need some of the essential facts about financial management. Even if you hire a financial planner or accountant, you should personally have a grasp on the most essential pieces of information to better manage your business.

Accounting 101

You cannot successfully manage a small business’s finances without at least knowing the basics of accounting. Accounting refers to the process of maintaining financial records. Accounting software helps you stay organized. The right software program makes it easier to input data and understand your profits and losses. You can monitor your revenue and expenditures, and receive alerts when something is amiss. If you do not have the time to dedicate to accounting, hire a professional to handle financial management for you. Trusting your finances with the right person can make all the difference to the success of your small business.

How to Create a Budget

Budgeting is another mainstay in small business financial management. Without a solid budget, you have no guidance for your future endeavors. Your company needs a strict, strong budget to guide business decisions. Otherwise, you could end up in the red and forced to close your doors. Here are a few basics of budgeting you should know:

1. Expenditures.

A list of all your start-up costs and ongoing expenses, including insurance costs, supplies, manufacturing costs, rent and utilities, advertising, permits, stock, staff wages, and equipment costs.

2. Income.

An up-to-date projection of revenue coming in, typically from product or service sales. You should estimate the sales your business will make during your budgeting period (typically one year). Your gross revenue is a sum of all the income you have received from customers, before taxes or deductions.

3. Net profit.

Also called net income, net earnings, or your bottom line. The difference between your projected expenses and revenue, or net profit, is the amount of money your company is making for the period. This number lets you assess how well – or poorly – your company is performing.

4. Cash flow.

Your cash flow forecast will anticipate projected revenue and expenditures over a 12-monoth or shorter period. Cash flow gives you insights into whether you will have extra money or need to trim the budget, so you can make smart decisions for the future.

Budgeting puts you in control of your business. It gives you insights into where you are doing well and where your business plan may need work. Knowing and understanding your small business’s numbers can give you a handle on finances now and in the future. This can help you avoid dangerous mistakes, identify what makes the most profit, and have a plan on how to capitalize on moneymaking opportunities.

Most Important Money Management Documents

Managing small business finances takes a lot of paperwork. Your accounting department will need to keep up with certain documents to pay your taxes, apply for business loans, and track your profitability. Understanding what documents you need to track your spending and map your future finances can help you get started. A few of the most important documents to know are as follows:

• Balance sheets.

Balance sheets provide a snapshot of where your business currently stands financially. It lists your company’s net worth based on assets and liabilities. Your accounting department should generate balance sheets regularly to keep track of how things are going. Set aside time at least once per month to analyze balance sheets.

• Profit and loss sheets.

Profit and loss statements, or income statements, summarize a year’s worth of business income and expenditures. This allows you to determine your net profit (or loss) for the year. An accurate profit and loss sheet can give you guidance as to what to change in the future.

• Cash flow statement.

Your small business needs enough cash on hand to cover monthly bills and expenses. A cash flow sheet tracks your revenue and expenses during a specific time period, such as a month. Cash flow gives you insights into whether you need to cut back on expenses to meet your financial responsibilities for the period.

• Forecasts.

One of the main advantages of staying on top of financial management is the ability to make accurate predictions about the future stability of your company. Revenue forecasts take past performance to project the future income of your business. Forecasts can help you make educated decisions about your company, such as whether you have enough income to hire a new employee or create a new product.

Keeping up with financial documentation helps you avoid unwelcome surprises, such as learning you don’t have enough in your monthly budget to cover business expenses. It also gives you the information you need to make smart decisions for the future. You may want to wait on hiring someone new, for example, if your profit and loss sheet shows that your company is currently breaking even. Creating and reviewing accurate, detailed financial documents can keep you informed about the state of your business.

Common Challenges in Small Business Financial Management

Small business financial management is complex. Whether you are new to business planning or an established owner, you could encounter common challenges that throw your budget off track. Recognizing potential roadblocks is the first step in planning and preparing for them. You can typically prevent finance issues with accurate financial planning. Ignoring your budget, however, is asking for problems such as:

• Cash flow interruptions.

Issues with cash flow can occur during slow periods. If you do not plan your budget ahead to accommodate cash flow crunches, you could encounter serious problems – such as not being able to pay your employees. Use cash budgets and financial planning to cover dry spells during the year so you don’t have to go into debt.

• No money for production.

If your profit and loss statements are showing lack of funds to continue production, leverage available assets as a solution. Raise money by using your assets as collateral to secure loans or increase the equity in your business. Be careful, however, not to leverage too many assets. This could be the equivalent of handing over ownership of your business.

• Paying taxes.

Do not ignore tax planning in your financial management solution. The Internal Revenue Service is very strict when it comes to a business paying their taxes. Learn about the current tax laws and follow all applicable rules. Take advantage of opportunities to save on your taxes, and pay on time to avoid penalties and interest.

Knowing what to expect puts you ahead of the game. You can confidently map your strategy, make room to accommodate potential pitfalls, and track how your company is doing with smart financial management. Thinking ahead about the specific problems your company could face based on personalized information about your finances can put you in the power seat. Keeping up with financial documents is the best way to foresee and avoid major issues.

Do You Need Help With Small Business Financial Management?

Managing the money at your startup can feel overwhelming – especially if you do not have a background in accounting. Luckily, you don’t have to tackle financial management alone. Diversified Management Services, Inc. can help your small business stay on track and capitalize on opportunities for growth with comprehensive solutions. We can handle bookkeeping, accounting, payroll, and other tasks for your small business in Southeastern Wisconsin. Whether you need QuickBooks training or want to develop a personalized system to successfully manage cash flow, we can help. Submit our contact form today for more information.

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