Too often, business startups fail because the owners don’t keep track of their finances. But this is one of the most important parts of starting a business. You’ll need to cover things like payroll, supplies, taxes, and any business loans you may have received to get started. Consider this your quick guide to managing business finances and ensuring you stay on track as your business grows.
Keep Your Personal Assets Separate
Many first-time business owners make the mistake of starting a business using their own funds.
Even if you use your own capital in the earliest phase of your business, you need to separate your business and personal funds as soon as possible. Failing to do so can create confusion when it’s time to file taxes, and it can also mean you’re financially liable for any business losses you incur.
Start by obtaining an Employer Identification Number (EIN) from the IRS. An EIN is like a Social Security number for your business and gives it its own identity.
Next, use this EIN to open a business bank account. You’ll use this account for all of your business transactions. Here’s a tip: Open multiple bank accounts and use one for income, another for payroll, and another for expenses. This will help you stay organized and make life a lot simpler.
Set a Working Budget
When managing business finances, you need to account for every penny that comes in and out of your business. To get started, make a list of all of your liabilities. These may include things like:
- Debts and business loans
- Inventory and equipment
- Payroll
- Franchise royalties
- Taxes
- Utilities
- Business insurance
This list can give you a better idea of how much money you’ll need to cover these expenses, as well as how much you’ll need to maintain profitability.
Choose a Bookkeeping Strategy
Bookkeeping refers to the method you’ll use for recording your business finances. Basically, you have three options.
First, some small business owners keep their own books, using the latest bookkeeping software. This is often the cheapest option since it doesn’t require the addition of any other employees.
However, as your business grows, this task can become increasingly cumbersome. This might lead you to consider the second option: hiring a full-time or part-time bookkeeper.
If the expenses of an in-house bookkeeper seem prohibitive, you might consider outsourcing your bookkeeping needs. This means hiring an online accounting firm that can handle your finances in exchange for a fee.
Regardless of who manages your books, business owners are ultimately responsible, so make sure to review your reports regularly, especially in the early days of starting a business.
Understand Cash Flow
Cash flow refers to where your money goes. A cash flow statement will cover a specific time period and highlight the way that money is spent within your organization.
Understanding cash flow is important for two reasons. First, keeping a handle on your cash flow can show areas in which money gets wasted by your company.
Second, your operating cash flow will give you an idea of how much working capital you have to invest in the business. If you want to tackle a specific project or expand your operations, you’ll need access to cash to do so.
Don’t confuse cash flow with profits. Profit refers to how much money you’re making in an absolute sense. But your operating cash flow will tell you how much money you physically have to work with at any given period. Both are important when managing business finances.
Create Your Financial Statements
To properly manage your finances, you’ll need to know how to create your financial statements. Your income statement (also known as your profit and loss statement) records all of your income and expenses for a given window of time.
Your balance sheet keeps track of your liabilities and equity. Lenders and investors will commonly expect to see your income statement and balance sheet to understand the financial workings of your business.
Finally, your cash flow statement will help you assess your inflows and outflows of cash and can ensure that you retain enough working capital to cover your expenses, pay your employees, and invest in new business projects and opportunities.
Franchising is a Fast-Track to Business Ownership
Sometimes, the most successful businesses are the ones already in operation. Owning a franchise can simplify your business activities since the business model has already been proven successful. Franchise Gator offers a free tool that you can use to find your next opportunity. Search for franchising opportunities in your area, and reach your truest financial potential.