Businesses finances are often confusing if you are new to them. Trying to understand them is one of those tasks that so many business owners procrastinate on! Trust me, understanding them will be so helpful. How can you know how well your business is performing without understanding your finances? You don’t want to end up in a situation where you are spending more than you are making. Or perhaps nobody warned you that you had to pay X amount of tax at the end of the quarter! Avoid nasty surprises by understanding exactly what’s happening and importantly stay on top of it throughout the year.
Here are my top 5 tips for keeping on top of your business finances:
Learn how to read your Profit and Loss statement and Balance Sheet
Some business owners have had plenty of experience with P&Ls and Balance Sheets in previous corporate roles, however some have never had to look at one in their life. It’s really important that you understand these and can read them so that you can see what is driving your business profitability or losses. If you are using an accountant, that’s fantastic! Ask them to explain it to you though so that you can check in every now and then see how your reports are looking. Most basic business accounting packages make it so simple to view your reports, don’t rely on your accountant to send you one every quarter or every year! I would recommend a review at the end of each month as a minimum to keep track of your progress.
Cash flow is king
I’m sure you’ve heard it before but cash flow can make or break a small business. No matter how profitable your business looks, if your clients aren’t paying fast enough, or you have to pay lots of bills before receiving that amount of income, it could mean you are out of cash. Starting to rely on credit cards, overdrafts or loans can quickly become dangerous. I have no issue with business loans, leases etc. Calculated risk and income earning debt is not a bad thing, and is often the only way for business to grow. However, not being able to pay your most basic bills may present a problem.
Know your tax liability
I’m in Australia so this might be different around the world, but the principal is the same! Understand how much of your sales you need to set aside for tax. 10% of sales for GST in Australia. Using basic accounting software it should be easy to generate a report at the end of each month showing your GST liability. Set this money aside as soon as you can after the end of the month, so that you don’t get caught out at the end of the quarter when BAS is due. You may be liable for other taxes depending on your earnings, profitability and business structure, so speak to your accountant. They will tell you what taxes your business will have to pay. It’s a good idea to get in the habit of calculating your taxes straight after the end of the month, and put this money aside for when it’s due. It will reduce your stress levels!
Use accounting software
I’ve mentioned accounting software several times above. So often in business forums I see people who say “I really want to use xyz accounting software but it’s so expensive at $10 a month.” I always wonder, what is the cost of getting it wrong though? A spreadsheet leaves so much room for error. Most accounting software syncs with your business bank account, so that no transactions are missed. It saves you typing them in and reconciling them gives you the opportunity to do a quick double check on them. It allows you to see up to date reports. With some software your accountant can also have access, so they can go in and get the details required for taxes and any government recording. If your business has staff, invest in the better programs so that you can process payroll, leave etc. In summary, it makes business life so much easier and is worth every cent!
Learn how to use a spreadsheet
OK so I just told you to use accounting software to track your business transactions but now I’m telling you to learn how to use a spreadsheet? Yes! Spreadsheets come in handy for all the things you may not be able to use accounting software for. They are so versatile and you will almost certainly have a use for them. Some of the reasons you might need a spreadsheet, they’re a great tool for preparing a budget, calculating staff costs, tracking cashflow and any “lists” you may have (like clients, leads, timelines, stock lists, social media posts etc.)
Using the tools above it should eventually become simple to stay on top of your business finances. Pick days of the week or month where you do a ‘financial health check’, and schedule these in. You’ll be surprised at how much more confident you feel being able to understand the exact financial position of your business.