Most small business owners (SBOs) admit they are not financial experts – they run a business because they love their trade. Unfortunately, financial slip-ups often come at a big cost. In fact, 82% of small businesses fail due to poor cash flow management.
Getting off on the right foot in 2022 after another year of uncertainty requires some fiscal fitness – but what should SBOs prioritize?
Understand cash flow
To survive as a small business owner, understanding what cash flow is and the impacts it will have on your business is essential. Cash flow is essentially a measurement on the total cash coming in and out of a business over a specific period of time, showing how much cash your business has on hand and serving as a litmus test for a company’s financial health.
Through proper management of cash flow, business owners can predict profits and losses, plan ahead for business disruptions and better understand what to charge for your end product/service. For example, if July is a traditionally slow month for your business, understanding your cash flow can help you prepare in June through responsible saving and investing in advance.
Maintain separate personal and business banking accounts
Keeping your personal and business bank accounts separate makes it much easier to figure out which expenses are business-related and which are tax deductible.
Going through every transaction and receipt to determine your total tax obligation each year is no walk in the park when you own a business, especially in times when all is going well and sales are influx. This process is a hassle even if every piece of information is in the same account, and becomes even more complicated when your income is displayed in multiple locations.
Having your business-related information in one place can help give you a clearer image of your expenses, revenue, and earnings. And knowing what your profit is allows you to make better business decisions, such as whether to upgrade your equipment or hire a new employee.
Link your banking account to your bookkeeping
When you look at your books, you want to know they reflect the truth. If your bank account, credit card statements, and bookkeeping don’t match up, you could end up spending money you don’t really have—or, alternatively, holding onto money you could be investing in your business instead.
Linking your banking account to your books helps you have a higher degree of visibility into your cash flow – a crucial part of managing any business.
Using an accounting software that connects to your bank eliminates the mundane task of manually entering information, giving you more control over tracking sales and expenses efficiently. This financial habit will help you to easily keep track of income and expenses.
Track business receipts and ditch the shoe box
Maintaining a record of your small business activities is critical to your company’s survival and success. Recordkeeping serves as a window into how your business is performing. Business receipts serve as the foundation for your financial statements and tax return preparation.
Don’t rely solely on your business account to keep track of your transactions. It’s important to retain records and documentation of each transaction, as they will be handy come tax time, especially if you face an audit.
To avoid headaches down the road, ensure that you are capturing and filing your receipts in real time. Getting in the habit of digitizing business expenses as they are incurred by taking pictures through a receipt scanner will help minimize the likelihood of missed transactions and guarantee more accurate accounting.
Using accounting software can also help you to better manage transactions and expenses through categorization. Business owners can make more informed decisions about their cash flow by referring to digital software reports and analyzing business decisions.
Embed digital payments into your invoices
According to Visa, half of America’s small businesses had no online presence before the pandemic. In an attempt to adapt to changing times, small business owners in the U.S. and abroad have had to figure out how to increase digitalization through initiatives like implementing digital payment methods such as offering contactless payments as an alternative to traditional checks or cash.
Recent Wave data showed that when business owners make it easier for their customers to make online payments directly from a digital invoice, their customers are more likely to make payments on-time, helping to improve cash flow and ease income volatility. According to the same study, 15.4% more invoices were paid on time when digital payments were enabled on invoices. Enabling payments on digital invoices is an undeniable way of getting paid faster, and also has other advantages. Coupling invoices tightly with payment history also makes cash flow tracking significantly easier and saves headaches come tax time.
Prepare for tax season throughout the year
Many small business owners dread tax season. Not only does it mean extra work on your plate, the fear of getting audited if you make a mistake can add stress to already complex business operations. In fact, The National Small Business Association notes that around 20% of small business owners spend up to 120 hours on taxes each year—that’s a lot of time spent away from actually running your business.
Leaving your bookkeeping to the last minute can be stressful and erroneous. Since it’s a collection of small tasks that build up over time, it can prove challenging to tackle all at once. As small business owners know, tax time comes more than once a year. If you aren’t keeping track of your books, deadlines like your quarterly tax payments can easily throw a wrench in operations, and can even sneak by without you noticing.
The best thing entrepreneurs can do is set aside some time throughout the year to review records and ensure everything is up to date and accurate. Keeping an eye on your books throughout the year can also give you a better idea of your cash flow, which can ultimately help you make smarter financially informed business decisions.
David Axler is the GM/VP Banking and Books at Wave.