Running a business is no small feat, and managing the business finances is crucial to keep the business going smoothly. This will also help you plan for the future and make informed decisions. If you neglect the business finances, you could lose on a few tax deductions and have problems getting a loan. If you are a business owner and are ready to manage your finances better, we have tried and tested tips to help you with the same and ensure you build a business foundation that helps you grow.
1. Keep Your Personal & Business Finances Separate
Several business owners have a habit of using their credit cards to cover their business expenses, and they often deposit the business checks in their checking accounts. It might seem convenient, but it could also have serious implications. You are eligible to deduct the business-related expenses like business supplies and travel, but you will have to provide adequate documentation for the same. When you do not have a clear record showing that the transactions were business-related, you will lose out on these deductions. Keep a business bank account separate and only use it for business purposes.
2. Get the Financial Documents in Place
Business owners know the importance of financial documents, and they provide a deep dive into the financial health of your business. You should have the balance sheet, profit and loss statement, and cash flow statement in place. A balance sheet will show what the business owns and what it owes at a certain point in time. It will also show the amount of equity, which is the money you would be left with if you sold all the assets in your business and paid off the debts. The numbers can help understand whether you will be able to scale your business or not. Next is a profit and loss statement which will show the revenue, expenses, and profit or loss of the business over some time. This statement shows whether your business is making profits or losses, and if you are looking for investors, they will take a look at the profit and loss statement before deciding whether to lend to you or not. Lastly, the cash flow statement will show the cash that has moved in and out of the business over a specific period, and it shows if you have enough cash to pay your bills.
3. Remember to pay yourself
As an entrepreneur, you might pay yourself last or sometimes forgo the paycheck to maintain an adequate cash balance or to put the money back into the business. The experts at CPA firms in Northern Virginia state, “When you pay yourself, you can enjoy a few advantages, and this is something you do not want to miss. It will help pay your expenses and you can show it as a salary in your business account.”
There is a difference between taking a salary and a draw that a CPA can help you understand better.
4. Understand the best accounting practices
An important financial decision to make is to choose between the accrual and cash basis of accounting. Both accounting methods can be used in a business, and they have their pros and cons. A cash basis of accounting is based on the cash activity in your business whereas, an accrual basis will be a little complex since it tracks the revenue when you earn it and the expenses when you incur them. Understand how it works and then choose the method that best suits your business. Do not pick an accounting practice simply because someone you know uses it.
5. Use an accounting software
You might be using a notebook or a spreadsheet to manage the business finances, but that is not the right way of doing it. Accounting software will help streamline business financials and make it easier for you to track income and expenses. If you have an accountant, they will also be happy to get the financial statements in their inbox each month instead of having to maintain multiple papers and spreadsheets. Look at all the available accounting software options and compare their prices. Pick one that best fits your needs. You will need software that offers cloud access so you can look at the documents anywhere, anytime. Also, look for software that has automation so that regular tasks like sending invoices can be easily completed.
6. Work on the business credit score
It helps to remember that your business credit score will have an impact on everything from signing new deals to qualifying for a loan and the rate you will pay for business insurance. Hence, watch out for the business credit score and check the report regularly. Be aware of the lenders or credit card companies that report your score to credit bureaus, and if you notice anything wrong in the credit report, write to them immediately.
7. Pay taxes on time
All businesses are liable to pay Federal Income Tax on their business income, and you need to be aware of the tax rate. It will depend on your business structure, and you should be aware of it well in advance. Make it a habit to set aside a part of the income every month so that it doesn’t feel like a burden when it is time to pay your taxes. It will also ensure that you have enough cash available to make the tax payments.
Running and scaling a business is no easy task. But if you follow these tips, you will be in a better position to manage your business finances and ensure that you have it all in place. As an entrepreneur, you have big goals and plans to achieve, but if your finances aren’t in place, it will only become tough for you to achieve your goals. Start today and seek the help of a professional if you need to, but ensure that the documents are in place and you are in control of the incoming and outgoing in the business.
Michael Zhou is a Senior VP of Business Intelligence Development and has assisted the Fortune 1000 company with expertise in the web as a whole, including ground-zero marketing efforts that benefit both consumer and vendor. He is also a contributor on Esprittoday.