Managing your business finances is crucial for the success and growth of your company. Whether you are a small business owner or a large corporation, you need to have a clear understanding of your income and expenses, your cash flow, and your financial goals. In this article, we will provide you some tips on how to manage your business finances effectively.
Choose an Accounting Method
The first step in managing your business finances is to choose an accounting method that suits your needs and preferences. There are two main accounting methods: cash basis and accrual basis.
- Transactions are recorded using cash basis accounting when money is exchanged. This implies that you keep track of your earnings as soon as you receive them and your outgoing costs as soon as you pay them. Cash basis accounting is simple and easy to follow, but it may not reflect the true profitability of your business or match your tax obligations.
- Regardless of when money is exchanged, accounting on an accrual basis records transactions as they happen. As a result, you must keep track of both income and expenses as they are incurred. Although it is more complex and time-consuming to maintain, accrual basis accounting provides a more accurate picture of your company’s performance and is in line with your tax obligations.
You should consult with a professional accountant or tax advisor to determine which accounting method is best for your business.
Develop a Bookkeeping and Payroll System
After selecting an accounting method, you must create a bookkeeping and payroll system that enables you to accurately and effectively track and record your business transactions. You can either use a DIY accounting program or hire a bookkeeper to help you record and report business transactions.
A bookkeeping system should include the following components:
- A chart of accounts that lists all the categories of income and expenses for your business
- A journal that records the date, amount, and description of each transaction
- A ledger that summarizes the transactions by account
- a trial balance that ensures that the total debits and total credits balance out to ensure the ledger’s accuracy
- A profit and loss statement that displays the revenues and costs for a particular time period
- a balance sheet that displays the assets, liabilities, and equity of your company at a specific time
- An account of the sources and expenditures of cash for a specific time period
These elements should be part of a payroll system:
- An employee payroll register that details each employee’s pay, deductions, and net pay for each pay period
- a payroll tax report that determines the amounts of taxes deducted from employee paychecks and paid by the employer for each pay period
- an accounting tool that records payroll activities in a journal and adds them to the ledger
- a payroll reconciliation that checks the payroll system’s accuracy by comparing the payroll register, tax report, journal, and bank statements
Create a Separate Business Bank Account
Another important step in managing your business finances is to create a separate business bank account that is used exclusively for your business transactions. This will help you to keep your personal and business finances separate, avoid confusion and errors, simplify your bookkeeping and tax filing, and protect your personal assets from business liabilities.
To open a business bank account, you will need to provide some information about your business, such as its name, address, legal structure, tax identification number, and registration documents. You will also need to choose a type of account that suits your needs, such as a checking account, a savings account, or a merchant account.
Pay Off Debt and Pay Yourself a Salary
Maintaining a balance between your personal income and your debt obligations is one of the challenges of managing your business’ finances. To cut your interest costs and increase your cash flow, you should try to pay off any high-interest debt as quickly as you can. A fair salary that recognizes your efforts and contributions to the company while not jeopardizing its financial stability should also be paid to you.
To determine how much salary you should pay yourself, you should consider several factors, such as:
- Expenses for your own personal support
- Your business profitability
- the effects on your taxes
- Your retirement goals
- Your industry standards
You should also review your salary periodically and adjust it according to your business performance and personal needs.
Evaluate Your Accounts and Accounting Methods Periodically
Managing your business finances is not a one-time task. You need to evaluate your accounts and accounting methods periodically to ensure that they are accurate, up-to-date, and compliant with the relevant laws and regulations. You should also use your financial statements and reports to analyze your business performance and identify areas for improvement.
Some of the questions you should ask yourself when evaluating your accounts and accounting methods are:
- Are my books in harmony and balance?
- Do my transactions get properly and consistently recorded?
- My financial statements: Are they accurate and complete?
- Are my tax returns filed accurately and on time?
- How well-suited are my accounting practices to the nature, size, and sector of my business?
- Are there any modifications to the tax laws or accounting standards that will impact my company?
- Are there any opportunities to reduce my costs or increase my income?
Review Your Business Expenses, Overhead Costs, And Margins
Reviewing your business costs, overhead, and profit margins on a regular basis is another aspect of managing your company’s finances. This will enable you to maximize your profitability while maximizing your efficiency and spending.
The costs involved in maintaining your business operations are known as business expenses. Direct expenses (like the cost of goods sold) and indirect expenses (like rent) are the two categories into which they can be divided. You should keep careful records of every business expense you incur and classify them based on what they are. You should also review them periodically and look for ways to reduce them without compromising quality or customer satisfaction.
Overhead costs are the constant expenses that are unaffected by sales volume or production output. They include items such as rent, utilities, insurance, salaries, depreciation, etc. Overhead costs can eat into your profits if they are too high or not allocated properly. You should monitor your overhead rate, which is the ratio of overhead costs to sales revenue or production output. You should also review your overhead costs periodically and look for ways to lower them or allocate them more efficiently.
The difference between sales revenue (or production output) and costs (or inputs) is known as the margin. They gauge the amount of profit you generate from each sale or piece of production. Gross margin and net margin are two different types of margins. Gross margin subtracts the cost of goods sold from the revenue from sales. Net margin subtracts all costs from the revenue from sales. For each good or service you provide, you should compute both types of margins. Additionally, you ought to contrast them with market averages or the profit margins of rival companies.
Use Financial Services And Tools To Manage Your Cash Flow
Use financial services and tools to manage your cash flow as the last but certainly not least piece of advice on how to manage your business finances. Cash flow is the lifeblood of your business; it is the amount of money flowing in (from sales)and out (for expenses)of your business over a period of time. Having positive cash flow means that you have more money coming in than going out; having negative cash flow means that you have more money going out than coming in.
Managing cash flow effectively means ensuring that you have enough cash on hand at any given time to meet your financial obligations on time (such as paying suppliers)and in full (such as paying taxes). It also means planning ahead for future cash needs (such as investing in equipment)and avoiding cash shortages (such as running out of inventory).
To manage cash flow efficiently, you can use various financial services and tools, such as:
- Business banking: Choose a bank account that offers low fees, high-interest rates, online access, overdraft protection, etc.
- Business debit or credit card: Choose a card that offers rewards, low-interest rates, fraud protection, etc.
- A business line of credit or credit card: Use these options for short-term financings, such as covering temporary cash gaps, taking advantage of discounts, etc.
- Business loan: Use this option for long-term financings, such as funding large projects, expanding operations, etc.
- Invoice financing: Use this option to get an advance on outstanding invoices, which can improve cash flow and reduce collection risks.
- Cash flow forecasting: Use this tool to project future cash inflows and outflows based on historical data and assumptions
