Managing Small Business Finances: What to Focus On

When it comes down to it, the process of financing your business will largely depend on which unique method you choose. This being said, however, if you’re looking into debt financing (and to some extent, equity financing) the next step in the process will be evaluating your business’s qualifications. Plus, even if your business isn’t in one of those industries, there are still a variety of government, private, and other grants you may qualify for.

Understand Business Accounting

And the more you learn to manage money, the easier and more intuitive it will become. Net profit margin tells you how much income your business is bringing in after expenses and gives you a picture of the overall profitability of your business. It’s a way of factoring all of the other expenses cell phone depreciation has your phone lost worth your business incurs into the cost of your product. If your net profit is low, you might need either to decrease your operating expenses or increase the cost of your product. The good old shoebox is a classic trope for receipt and record storage, but it’s not the most effective system.

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Generally accepted accounting principles, known as GAAP or “Gap,” provides a common a way to standardize financial reporting using the accrual method. The Financial Accounting Standards Board (FASB) maintains GAAP in the United States. For example, if you make a sale in January and receive the $200 payment in February, an voting trust agreement definition accrual method would allow you to record that on January’s books, while the cash method would require that payment to land on February’s books. Businesses often use either the accrual or cash methods of recording purchases. The accrual method puts transactions on the books immediately upon completing the sale.

Types of small business financing options

But the biggest benefit to keeping on top of your bookkeeping is always having a clear picture of where your business stands financially at the moment. So if you invoice a client, you wouldn’t recognize that revenue until their payment clears. In accrual accounting, sales, purchases, and expenses are recognized as soon as calculate estimated tax payments and associated penalties they’re billed. Even if you haven’t hired any staff yet, be sure to include the value of your own labor to help you evaluate the efficiency of your business. (If your own hourly “wage” ends up being unsustainably low, your business will need fine tuning.) It can also give you a good sense of when it’s time to start outsourcing tasks to someone else.

1. Small business accounting interprets those transactions over longer periods of time.
2. Crowdfunders aren’t technically investors, because they don’t receive a share of ownership in the business and don’t expect a financial return on their money.
3. If you apply, lenders will review your personal and business credit histories and financial statements, and they may require collateral to secure the loan.
4. It’s more complicated than single entry, but it provides more information about your business.

The next step to managing your business finances is understanding and getting a handle on your credit scores. Whether it’s a property or equipment lease, a business credit card, or a small business loan, at some point over the life of your business you’ll need access to credit. In addition to SBA loans, credit unions can offer a range of financing options, including lines of credit, traditional term loans and business credit cards. Even if you don’t need a loan or additional financing for your business right now, you might in the future. Use a commercial loan calculator to easily calculate fixed-rate loans and then discuss your options with your bank.

If you’re looking for angel investors, sites like Angel Capital Association and AngelList can connect you with accredited angel investors. Getting a handle on your business finances can give you a clear picture of your company’s financial health and help inform important business decisions, like hiring employees or investing in equipment. Once you’ve mastered the basics of small business accounting, you’ll be better positioned to prepare your business for future growth.

As your small business starts to grow, you might want to consider incorporating. That means if your business ever faces financial or legal trouble, your personal assets, such as your home or a college fund for your children, are, in most cases, protected. Let’s look at essential accounting and finance skills for successful entrepreneurs, including building a budget, tracking spending, and creating financial statements that are easy to understand.

Your cash flow statement reflects the inflow of revenue and outflow of expenses resulting from all your business activities during a specific time period—usually a month or a financial quarter. Inflow will come from selling goods and receiving payment on invoices, while outflow comes from things like purchasing inventory, payroll, and paying marketing costs and other overhead expenses. So, with all of this being said, you can separate your personal and business finances by opening a business bank account. Choosing the right bank account for your business is a crucial step to effectively managing your business finances.

Should you choose to go this route, you’ll want to do everything you can to keep it professional. You can offer a professional-quality investment proposal as you would to any other investor, and set the exact terms of the investment in writing. That way, you’ll face less risk dealing with miscommunications or relational challenges down the line. If your family and friends seem supportive of your business venture, they may be willing to invest funds to help your business succeed. Of course, accepting funds from friends or family comes with its own set of challenges.