Motherhood is busy, business is busy and becoming the expert on everything you need to know to own and operate your business, while keeping track of everything that our kids need is exhausting. Here’s the good news: You don’t need to be a finance whiz to master your business’ finances. There are a few key concepts to grasp to stay informed and ahead on your finances. This post is designed to give you the quick and easy information on business financial management:
Cash Flow Management
Cash flow is the lifeblood of your business. It represents the movement of money in and out of your company. Positive cash flow means more money is coming in than going out, while negative cash flow indicates the opposite. To maintain healthy cash flow:
- Create cash flow projections
- Consider posting ahead expected expenses in a cash accounting cycle, and maintaining daily cash and expense records to give you accurate cash flow data. For example: When you receive your payables in the mail, enter them as they come, and deduct those totals from your current cash data to know exactly what leverage you have.
- Monitor accounts receivable and payable
- Keep track of all accounts receivable on a 30, 60, and 90-day cycle if your business offers this. Begin reaching out to unpaid balances with-in 45 days, and have a strong collection management system in place for 90-days. Pro-tip: Consider charging interest on receivables, or use a finance company to carry your receivables and give you your full cash value in the immediate. Receivables can break a business.
- Enter (and even pay) all payables as they come in to keep your profit and loss statement accurate, lower your liabilities, and depict an accurate cash flow daily projection. Review payable entries (expenses) every 30 to 60 days to look for value held in payables, rate changes and more.
- Consider offering discounts for early payment
- Cash payments and early payments can give your business leverage, considering enticing buyers to make their payments rather than charge.
- Establish an emergency fund
- Emergency fund or emergency plan – when cash is running low, or a series of large expenses are out, and the in-flow of cash hasn’t returned yet come up with a secondary bank account fund, or line of credit to get you through the tough days.
Financial Statements
Familiarize yourself with three key financial statements:
- Income Statement: Shows revenue, expenses, and profit over a specific period
- Balance Sheet: Provides a snapshot of assets, liabilities, and equity at a given time
- Cash Flow Statement: Details cash inflows and outflows
These documents offer valuable insights into your business’s financial health and performance, assist in projecting business health and sales prices, and help you decide on your return factor in your business as you prepare for taking on new opportunities, selling a business, inviting investors in or making further business investments.
Budgeting
Create a detailed budget that outlines expected income and expenses. This helps you:
- Set financial goals
- Allocate resources effectively
- Identify potential issues before they become problems
- Make informed decisions about spending and investments
Profit Margins
Understanding your profit margins is essential for pricing products or services and assessing overall profitability. Calculate:
- Gross Profit Margin: (Revenue – Cost of Goods Sold) / Revenue
- Net Profit Margin: (Net Income / Revenue) x 100
Break-Even Analysis
Determine your break-even point – the point at which total revenue equals total costs. This helps you understand how much you need to sell to cover all expenses and start generating profit. Use your Gross Profit Margin to find the appropriate sales dollar, to find the break even point: Expenses X GP% = Sales
Financing Options
Familiarize yourself with various funding sources:
- Personal savings
- Bank loans
- Angel investors
- Venture capital
- Crowdfunding
- Government grants
Each option has pros and cons, so research thoroughly before choosing. Every business is different, and a mixture of sources and options may be available to you to make ends meet.
Accounting Methods
Understand the difference between cash-basis and accrual accounting:
- Cash-basis: Records income when received and expenses when paid
- This is the most common in retail-style businesses with minimal inventory. This style of accounting offers simplicity and understanding.
- Tax advantages are paying tax only on received income, and deducting expenses at time of payment. This gives flexibility to tax obligations.
- Accrual: Records income when earned and expenses when incurred
- Most common in businesses with large inventory, or credit sales. This is common in the construction industry where large jobs may be split into a series of payments.
- While more complex, this can be a more accurate view of total financials for large projects, and assist in easier projections.
Choose the method that best suits your business needs and complies with tax regulations.
Financial Ratios
Learn to calculate and interpret key financial ratios, such as:
- Current Ratio: Measures short-term liquidity
- Debt-to-Equity Ratio: Assesses financial leverage
- Return on Investment (ROI): Evaluates the efficiency of investments
These ratios provide valuable insights into your business’s financial performance and health.
Tax Obligations
Understand your tax responsibilities, including:
- Income tax
- Sales tax
- Payroll tax
- Self-employment tax
Consider working with a tax professional to ensure compliance and maximize deductions. I am not a CPA, and tax obligations can change from industry type and state to state. I recommend meeting with a CPA annually or bi-annually to adjust tax liability projections.
Financial Software
Invest in user-friendly accounting software to streamline financial management tasks, generate reports, and maintain accurate records. Options available look different for every business, in my businesses I use a series of different programs based on the data needed from the business. Most commonly for my smaller endeavors, I prefer the Quickbooks online platform as it is user-friendly, and connects you to financial professionals to assist in answering questions, as well as creates easy financial statements, and has an easy sharing platform to your CPA.
Conclusion:
While mastering business finance takes time, understanding these basics will give you a solid foundation for making informed financial decisions. Remember to regularly review your financials, seek professional advice when needed, and stay committed to ongoing financial education. With dedication and smart financial management, you’ll be well-equipped to navigate the financial challenges of entrepreneurship and set your business up for long-term success.