Ensuring your business’s finances are in order is one of your key responsibilities as a business owner. Organizing everything relating to your business finance involves some processes that can easily consume the time you need to run your business. This is because there are multiple payables and receivables that need to be dealt with all year long.
Irrespective of your business model or amount of small business accounting and finance knowledge, there are some essentials that all small business owners can follow in order to lay the groundwork for success.
If organizing your financial situation has been on your to-do list, but you’re feeling overwhelmed, we’ve got you covered. This article includes professional tips on how to organize your finances to start the new year. Trust us: By implementing the following strategies, you can budget wisely, keep your accounting system running smoothly, and have a positive cash flow.
Keep personal and business finances separate
When you first start out, it might seem like you can combine personal money with your business revenue and expenses. However, it is important to keep your personal and business transactions separate. Think about the tax implications and recordkeeping, if for no other cause. Separating and reporting expenses after the fact will require significant extra work.
You should open a business checking account and a business credit card on the day your business launches. This will help in tax optimization and protecting your personal finances.
Your personal and business accounts shouldn’t be used for business transactions. Regardless of whether you’re a sole proprietor, you should still do this because it is required if your business is set up as an LLC or corporation.
Separate Tax Monies
Create a special business account to accommodate all monies meant for tax payments. This exclusive tax account will isolate your tax monies from your daily financial dealings and help you resist the urge to tamper with your tax for day-to-day expenses.
Every month’s end, calculate your total earnings or have your accountant do it before considering your interest and taxes (EBIT). Your earnings are simply your revenue for each month minus operating costs. Now, multiply your earnings before interest and taxes (EBIT) by 25 or 30 percent, and move whatever amount you get into your business savings or money market account.
This amount should suffice to cover the cost of implementing your local and state income taxes, including self-employment taxes. Meanwhile, your amount may vary after doing the math. Preparation for annual tax filing happens year round. Always consult with your financial advisor to avoid mixing things up or misinterpreting values.
Establish a Financial Reporting System
Whether you have a financial supervisory board or not, it’s critical to have a financial reporting system. You need to create profit and loss statements quarterly, a balance sheet, and a cash usage report. These reports should also have deadlines to help you evaluate and understand how and when your business needs to scale. If your business is in its early stages, focus on cash accounting and cash flow predictions. Once your business starts gaining ground, you can hire an accountant to transition tasks internally.
Ensure you Track All Transactions
Keeping tabs on all your financial activities gives you an accurate overview of your financial position and progress. Most small businesses practice modern bookkeeping; you can start with it to record every transaction in your business. This way, you have a complete record of how money flows in and out of your business.
Additionally, set aside a day during the week to review and crosscheck the financial records of your business. This exercise is crucial in bookkeeping; you can’t afford to skip it. At the end of the year and during your yearly financial reconciliation, you will appreciate the essence of doing this weekly review.
Be Strategic About Your Business Expenses
Doing business involves making several expenses. However, not all expenses are necessary. Your business expenses will naturally increase as the business grows, hence the need to strategize. From inventory and office space to payroll, insurance, equipment, and technology – the expenses will arrive as you scale.
You need to understand where every dollar is being spent, and that can be complex. Yet, it’s critical to reducing business expenses. Sometimes, your decisions three years ago on the choice of a vendor or technology may no longer be cost-effective for your business today and in the future.
Suppose you are also tracking your expenses manually. In that case, you need a financial system that carefully segments your spending data and gives you an overview of how it will impact subsequent cash flow. This system will identify needless expenses and help you budget strategically.
Maximize Technology for Efficiency
Depending on traditional manual methods to manage your complex financial paperwork is a recipe for wasting time and money. Several digital tools are available to make the job easier and more efficient. For small businesses, going digital on your financial documentation can save up to 80 hours yearly and yield more tax benefits you would ordinarily miss out on.
Create a Miscellaneous Budget
However well-intentioned and comprehensive your monthly budget planning is, surprises may be in the mix. Plus, we are humans and bound to make omissions. The best way to hedge against these realities is to create a budget for miscellaneous expenses.
Delegate or Outsource Minor Activities
Delegate minor financial activities to other staff; if you do not have the staff capacity for that, consider outsourcing. This will help you focus on making critical financial decisions rather than fixing discrepancies in credits and debits. That’s what smart entrepreneurs do – they focus on the core activities of their business and outsource the rest or hire the best minds to do them. Arranging financial paperwork is not a core activity, so outsourcing bookkeeping tasks is always a good move.
Decide on your Payment Reception System
Financial transactions form the core of every business, hence, the need for a closer look at how you receive payments. Focus on fintech options that simplify how you receive payments and make it easier for your customers.
Your payment option depends on your business type. If, for instance, your business involves providing services to clients; you may need to send invoices to them. Are you going to take credits, debits, or both? Deploying an automated invoicing system will not only maximize time but cut costs while ensuring that you’re paid on time.
If your business sells products, you may consider accepting credit cards or creating an online payment method on your website for easier transactions.
In Summary
To keep your finances in order, you need business organization tactics. You cannot determine the profitability of your business without a system in place. Additionally, it will help you in avoiding hassles during tax season.
The tips provided here will assist you in maintaining control over your small business finances and creating a strategy that works for you.
Contact our Louisville, KY small business accounting and bookkeeping service office if you need advice, feedback and guidance with financial organization.