10 Finance Tips Every Small Business Owner Needs to Know
Small business owners and start-up founders, by necessity, must wear many hats and juggle numerous tasks and responsibilities. Oftentimes these responsibilities are both critical as well as outside of their core areas of experience and expertise. Arguably the most prominent of these has to do with their company’s finances.
Recent studies conducted by the Bureau of Labour Statistics say twenty percent of small firms fail in their first year of operation, and just thirty percent of them will still be in operation ten years after they are formed. The reasons for these failures could often have been alleviated, if not outright prevented, by a clearer understanding of the company’s finances alongside the strategic choices that understanding enables.
While having entrepreneurs simply hand off much of the company’s financial responsibilities to a trained expert would seem to be the clear and easy solution, it’s not quite that simple. Leaving aside considerations of budget, access, etc., even after engaging an expert accountant or bookkeeper in this capacity, the owner’s responsibilities on this front do not end. Instead those responsibilities shift to enabling that expert by properly managing and organizing the financial details they will need to properly do their job.
By following the following tips, business owners will be able to effectively equip their account or bookkeeper to not just execute their most basic responsibilities like balancing books or filing taxes. Equipped with clear, complete, and well-organized data, these professionals will be able to identify strategic opportunities, concerns, and priorities that can often make or break the success of a company.
Here are the 10 Actionable Accounting Tips Every Small Business Owner Should Know
Open Separate Accounts For Your Business: For small business owners, separating personal and professional finance is crucial. The easiest way to ensure this division is to simply open accounts specific to the business and only use those accounts for things related to that business. This goes for banking accounts, credit cards, vendor relationships, etc. Establishing distinct accounts streamlines financial management, enhances professionalism, and simplifies tax preparation.
Additionally, these clear demarcations help provide a clear audit trail, facilitate accurate cash flow tracking, and facilitate accurate budgeting and financial modeling When you know every record and transaction shown relative to an account is tied specifically to a corresponding business then it vastly streamlines the identification and categorization of expenses. Best of all, opening these dedicated accounts is a quick and easy process, generally only entailing filling out a form and providing your Employer Identification Number or Social Security Number (SSN) if you are a sole proprietor.
Maintain Accurate Records For Your Business: Keeping complete and accurate records is one of the most important things a business owner has to do. However, for a busy business owner juggling too much, it is also one of the easiest things to slip out of control. And once it does it can quickly become a daunting and overwhelming task to locate and organize it all.
These risks and challenges are why it is critical for a business owner to invest early in not only engaging with a financial professional but also in the technologies and internal processes necessary to retain these records and keep them organized. As such, business owners should include in their evaluation of an accountant or bookkeeper whether they provide support and guidance around managing and operationalizing these essential tasks. Good financial experts understand that the implementation and maintenance of these systems and processes are often as important as what is done with the data. After all, how valuable can the services of these experts be if they are based on incomplete and unreliable data?
Automate Accounting Processes: A corollary to the previous tip is to identify technologies and opportunities for fully or partially automating processes. Automating your accounting and bookkeeping process can enhance consistency and efficiency.
Examples include using tech with out-of-the-box integrations, allowing for seamless real-time syncing of data, intelligent processing and categorization, data validation, deduplication, etc.. Automation thus streamlines the generation and gathering of accurate financial statements, reduces human error, ensures compliance with accounting standards, and calculates estimated income taxes efficiently, significantly improving operational effectiveness.
Plan Ahead For Tax Expenses: Taxes have to be paid, but they won't be a big deal if you plan ahead.
It all starts with having an understanding of what your tax liability will be at the end of the year. By following the tips laid out above your finances should be in a reliable and organized state, allowing your bookkeeper or accountant to advise you on what kinds of payments to anticipate.
Once you have that in hand here are some tips to make sure you’re ready when tax payments are due:
Every month, set aside a prorated portion of your expected tax bill so that you have the money on hand when it comes time to pay.
Setting up a separate "tax fund" in your business account will help protect that money explicitly for the purposes of paying your taxes the same way you would pay into an escrow account as part of your mortgage payment.
To avoid shocks, you should know the different tax rates and due dates for the different things your business does. Remember, for most businesses you are required to prepay your prorated anticipated tax payment quarterly.
Maximize Billing and AP Terms: Maximize your cash reserves by negotiating flexible credit terms with key suppliers or vendors while keeping payment terms on your invoices as tight as possible. When you have extra cash on hand, prioritize paying off invoices where they offer discounts. Similarly, you can encourage prompt payment from clients by offering early/prepayment discounts, selling multi-month/year contracts, etc.. Utilize accounting software to automate invoicing and follow up reminders, minimizing the risk of accruing unpaid bills on either side of the ledger.
Learn to Understand Your Profit Loss (P&L) Statement: P&L statements are crucial for any business, but are arguably even more important for smaller, earlier stage companies. P&L statements allow you to evaluate the business’s financial performance over a fiscal year, revealing not just how profitable (or not) your business is, but also the underlying drivers of your profitability.
These statements are important for every small business as they provide insights into operational efficiency, align with cash flow statements, determine tax obligations, and break down profits (gross, net, operating, and before tax). They also aid in controlling indirect expenses, monitoring performances, and facilitating strategic future planning.
Explore Tax Advantages: Work with your financial expert(s) to determine where there may be tax advantages available. These can come in the form of deduction, credits, tax exemptions, carrying forward of losses, etc. However, to fully take advantage of these, you often need to structure your business and how you operate it to fit within the rules and guidelines the IRS and/or states have laid out.
This requires you to work closely with your financial expert and to have a clear handle on your finances. By leveraging technology solutions and automation, this can often be accomplished automatically and in real-time, with these tools even alerting you to where there may be risks or opportunities.
Avoid DIY Accounting: We began by calling out why most early stage business owners should avoid going it on their own when it comes to their company’s financials but it’s worth calling out explicitly here.
Handling accounting in-house as a small business owner can be extremely risky. Not only will it divert attention from another critical aspect of the company operation, but it also carries a significant risk of incorrectly reporting/filing, not fully or accurately paying off tax liabilities, or even potential fraud charges.
Outsourcing to a certified professional not only minimizes accounting errors and keeps financial records current but also identifies growth and cost-saving opportunities. It alleviates the workload during tax season, allows focus on more urgent tasks, and aids in future planning, ensuring the financial health and sustainability of your business. The reality is that for most early stage business owners investing in an accountant or bookkeeper will be a net positive from a profitability standpoint by avoiding potential fees and fines as well as identifying strategic cost and tax savings opportunities.
Invoice Accurately: Invoicing is a critical yet challenging part of business operations and is essential for efficient payment processes. A robust invoicing solution can streamline this task, offering customizable templates, tracking, real-time updates, and versatile payment gateways. For small businesses, efficient invoicing enhances record-keeping, presents a professional image, serves as legal documentation, and organizes sales, making it indispensable for financial management and business growth.
Set Reminders for Pending Payments: Your business stays healthy if you get paid on time. If someone pays you late, follow these tips:
Friendly reminders: If a client's payment is past due, politely but persistently send reminders.
Automate Reminders: Even better is to have reminders go out automatically. Not only does automating reminders mean that you won’t forget to send them, it also lessens the likelihood of a client taking offense to them.
Billing terms: Make sure that the due dates on your bills are clear so that everyone knows what to expect from the start.
Rules for late fees: Be clear and explicit upfront about your late fee policies. Not only will this help prevent someone from claiming they did not know, but it encourages them to pay on time, which, at the end of the day, is the actual point of such policies.
Use multiple channels: If you’re struggling to get an invoice paid, it’s important to leverage as many channels and ways to contact them as you have available. That can include email, calling, texts, LinkedIn, reaching out to other points of contact at the company, etc.
Conclusion:
In the breakneck world of early-stage businesses these 10 essential tips will help safely guide your business and its finances. With organization, diligence, and strategic decisions as your steadfast allies, every transaction, expense entry, and fiscal forecast becomes part of a larger picture of success.
