This guide outlines strategies to stay on top of your business finances and avoid problems that could crash your brand.
Owning an early-stage business can be rewarding; you have control over your own destiny, set your working hours, choose the employees you want to work with and feel proud of building something of your own. But not everything comes that easy. Owning a business carries a lot of responsibilities. Entrepreneurs must keep track of many different facets of the enterprise, from sales and marketing to shipping and hiring retailers — including business finances. There’s so much to manage and a lot to learn.
One area that should not, but is still neglected is financial literacy. After all, a business lives and dies by its balance sheet, so it’s important for business owners to understand basic business finances. They don’t need to be accounting experts. They need to have the basic financial know-how to read financial statements, ask the right questions, and understand the financial and tax consequences of their business decisions. As an early-stage entrepreneur, there are many hats you need to wear, including the cap of a business finances manager.
Why you need business finances ‘literacy’
Being financially literate means having an understanding of the economic and fiscal landscape of business finances. That means you need to traverse standard business terms like profit, balance sheet, and cost of goods sold, as well as understand what drives these numbers and the implications they may have for business operations.
Having sound financial literacy helps you ensure you can withstand downturns. It will allow you to take advantage of opportunities that arise and increase the company’s chances of succeeding. On the flip side, if you’re financially illiterate, your business finances — and your business — will eventually run into problems, such as allowing expenses to add up to the point where profits are worthless. More often than not, early-stage entrepreneurs fail to include the correct amount of taxes on their profit and loss statements. These are things that can cause your early-stage business to run aground if you’re unprepared.
- Taxes
- Pricing
- Cash Flow
How to increase your grasp of business finances
Make Sure You Read and Understand Your Profit & Loss Statement
The income or profit and loss statement is the most important financial report. It can create a budget and operating forecast and even measure your key performance indicators from the income statement.
The income statement tells you if your business is profitable or not. It starts with a summary of your revenue, details your costs and expenses, and then shows the all-important “bottom line.” If you’re looking for an easier way to update or build your income statement, you can skip the spreadsheet and use software such as QuickBooks. Whether you’re looking to sort your expenses or streamline any financial processes, you will likely find a tool that won’t disappoint. QuickBooks is an online bookkeeping software powered by accounting experts that will allow you to import bank statements, categorise transactions, and prepare financial statements every month.
Create a Financial Plan
When you create a 12-month forecast, you create a plan for your company, you give your company a direction and actionable steps that your early-stage business will take to reach new heights.
Whether you’re modifying your plan or starting from scratch, a financial plan should include:
- Income statement: How your business experiences profit and loss over a specific period.
- Balance sheet: This will help you see where your business stands, what you own, and what your business owes.
- Personnel plan: You need the right team to meet goals and retain healthy cash flow. The personnel plan should look at existing positions and help you see when it’s time to bring on more team members.
- Business ratios: This is a way to see financial features like your net profit margin, return on equity, reserves payable turnover, assets to sales, and more.
- Sales forecast: This should tell you how much you sell in a specific period.
- Income projections: How much you plan to make in a given period of time, usually a year.
- Assets and liabilities: Assets are what your business owns (can be things like stocks, accounts receivable, and inventory), while penalties include every obligation in your financial plans, such as accrued payrolls or taxes.
Improve Your Financial Know-Hows with Financial Management Software
Using a spreadsheet can help you accomplish your financial responsibilities when you’re just getting started. However, it’s easy to get overwhelmed, especially if you’re collaborating with others in your business.
Accounting software is worth the expense for business finances because it offers automated analysis, reporting, and forecasting capabilities. Even so, using cloud-based financial planning tools can help you automatically consolidate data and scale your business efficiency. Everyone within your business can access and analyse real-time information, which leads to better-informed decisions.
Track Your Progress Against that Financial Plan
Once you’ve built a financial plan, it’s critical to monitor your progress against that plan each month with your business finances. By doing so, you will spot up-to-date variances from your schedule and understand what got in the way of achieving your goals. Conversely, if the conflicts are advantages, you know what is going well and continue to follow that path.
Have System in Place for Cash and Outstanding Accounts Receivable
Cash management and preventing cash shortages is a critical activity to protect your early stage from financial ruin. You need to estimate your cash flow activities six weeks or more in advance and ensure that you keep cash reserves to help you get through more challenging financial times.
When it comes to outstanding account receivables, you should not be afraid to follow up on late payments. More often than not, people let their collectables get old, and it’s much more challenging to collect more senior payments than it is to keep current. Tracking your outstanding accounts receivable in your business finances and undertake early collection help with cash flow activities.
Summary
The bottom line is that knowing your business finances is the best way to grow your self-esteem and early-stage business. When you rely on someone or something (like a software tool) to guide you along the path and teach you what you need to know to keep your business up and going, you are securing the financial future for your business.
