When you are running a small business, things like balance sheets and long-term planning often take a back seat to the daily needs of your customers. As an entrepreneur myself, I know how it feels when you either have more work than you can handle or you’ve got to spend your days figuring out how to drum up more business.
As a result, many small business owners do not have a firm grasp on their financials. Some businesses simply don’t keep records throughout the year and instead tally everything up come tax time. Others are disciplined about keeping good records, but then never actually look at the numbers to learn about their business.
Strong accounting records are important for any dealings with the IRS, but they can also be a powerful tool for growing your business. When you have a firm handle on your business’ finances, you are in a better position to know where to focus your time and fix whatever aspects are holding your business back. Here are five easy tips for becoming more financially savvy:
1. Put Together a System for Organizing Expenses and Income
Small business accounting isn’t very complicated: you need to keep track of what your business spends (expenses) and what it receives (income). For starters, you’ll want to carefully record all your receipts (travel expenses, receipts for office supplies, invoice from your Web/email hosting company, cell phone bills, etc.) as well as your income receipts (invoices, check stubs, cash register tape, PayPal records, etc). Then, you’ll need to enter this information somewhere to make sense of the numbers.
Bookkeeping software automates most of the work for you, and fortunately there are some very good and affordable options out there, such as Mint or QuickBooks. There are dedicated apps for tracking expenses as well, like MileBug (mileage), Expensify (expenses), and Shoeboxed (paper receipts). Find the right system that works for you. It doesn’t necessarily have to be the most expensive and robust software available; sometimes simpler is better if it means you’ll use it on a regular basis.
2. Start Looking at Your Numbers Every Month
The point of organizing your records isn’t just to avoid an audit; you want to look at trends and numbers that can make or break your business. For example, you need to know how much cash your business has on hand, your rate of growth, your profit margin, and how much you are owed. You can compare this month or quarter to the same period last year. Are their seasonal trends? Is your business growing? Are you products/services priced correctly? Are you losing money from a certain product/service? Most financial software can put together these types of reports in seconds for you.
3. Get on Top of Your Accounts Receivable
Many small businesses work hard to close the sale, but fail to invest as much time in managing the receivables. Cash flow problems may not be a matter of poor sales, but poor accounts receivables.
You can help avoid receivable problems by making it as easy as possible for customers to pay you; for example, by accepting credit cards, accepting payments electronically, and using remote check capture to deposit checks without heading out to the bank. You can look into apps like Square for accepting credit cards and FreshBooks for invoicing. However, no matter what kind of method you use, it’s up to you to invoice your customers as quickly as possible, set payments terms that are in line with your industry, and stay on top of past due accounts.
4. Understand Your Cash Flow Cycle
If you understand your business’ regular cash flow cycle, you can better plan and reduce the stress that comes when cash is tight. How long does it take you to collect your receivables? How quickly do you need to pay your bills? Do you need help funding this spread?
You may not even realize it, but all businesses have some degree of seasonal trends. By running financial reports for the year(s), you can understand how your business ebbs and flows over the year, and plan accordingly. For example, when you know that work is light every August, you can choose to vacation then or use the time to plan ahead for the year.
5. Get in Touch with an Accountant
This is a perfect time of year to work with an accountant or small business financial advisor. That’s because there’s still time to act on any suggestions for your 2014 taxes.
If you are not interested in having someone handle your books on an ongoing basis, you can set up a consult meeting where you can ask all the questions you have been wondering about over the years: How can I lower my self-employment taxes? Should I stay a sole proprietor or become an LLC? What’s the best way to handle my inventory costs? How much of my travel costs can I expense?
You need to have your financial information organized to file your taxes. Why not keep up with your accounting throughout the year so it becomes a strategic asset?
For local business information on 15 million businesses, visit InBusiness.com.
This article was written by Nellie Akalp from Forbes and was legally licensed through the NewsCred publisher network.