Undeniably, the life of a small business owner can be pretty challenging. Whether it is overseeing routine operations, recruiting employees, or managing finances – entrepreneurs have a handful of responsibilities on their shoulders. Amongst all, staying on top of money-related matters is the most crucial one. You have to ensure the company has enough funds to pay for expenses, debt, inventory, and fixed expenditure. Likewise, you have to keep finances to eliminate the risk of bankruptcy.
So, any idea how to manage finances proactively? Before jumping to financial statements and forecasts, you have to track revenues, expenses, and profits. Similarly, you have to monitor debtors and creditors to keep the cash flowing into the business. Ensuring effective financial management will keep you out of stacks of paperwork and cash flow glitches, fostering business growth. However, if you lack money management skills, let us help you manage finances smoothly.
Here we are listing five essential accounting tips for small businesses.
1. Understand Bookkeeping Basics
Usually, entrepreneurs get away with inaccurate bookkeeping in the initial years. But as the company grows and tax deadline approaches, incomplete records can lead to hefty penalties and tax audits. Before running into issues, start maintaining records since it is an essential business chore. Alongside helping you plan, it allows the companies to prepare forecasts. However, maintaining records won’t be possible without adequate accounting knowledge.
Besides debit and credit listings, you should be well-versed with accounting principles. For this, you can either hire an accountant. Otherwise, you can complete an MBA with accounting concentration to handle business finances yourself. In addition to bookkeeping, you will also develop proficient number-crunching skills that can ensure effective financial management.
2. Keep Track of Debtors
Many business owners try to eliminate credit sales, but that is not possible. In B2B and B2C models, clients rely on credit sales since it gives them the flexibility to pay later. However, it creates working capital issues for businesses, but you can always limit credit sales. For instance, you can ensure credit sales aren’t more than 30% of the total revenue. With limited sales, you will have pending payments from only a few debtors. It will become easy to keep track and ensure they repay on time.
Moreover, you can create a list of debtors in a separate account to send them reminders regularly. You can also encourage early payments by setting smart payment terms with the debtor. Perhaps, you can give them cash discounts on early payments. For instance, if a client pays within 30 days of purchase, offer a 2% discount on their total amount. Such practices will keep the working capital stable while eliminating the threat of a liquidity crisis.
3. Automate Accounting Processes
With accelerating tech developments, businesses can automate accounting processes. The professional accounting software can record income and expenditure without conventional ledger accounts. You can connect the software with a business bank account, and it will automatically record the inflows and outflows. Thus, you can keep a close eye on all expenditures and income. In addition to speeding up the processes, accounting software eliminates the chances of human errors.
Moreover, accounting software can send and pay invoices. The accountant can schedule the electricity bill for the 5th of every month, and it will automatically deduct this amount from the business account. Likewise, if you had to pay a supplier on 15th May, the software will send payment on the due date. Before choosing any accounting software, make sure it aligns with your business needs and financial capacity. Also, always opt for cloud-based software to access finances on the go.
4. Create Profit & Loss Statements
Any clue whether the business is running into losses or making money? Profit and loss statements give a snapshot of a business’s financial performance. It highlights sales, purchases, expenses, and profits for the month, quarter, or year. Therefore, every business should prepare financials to make informed decisions that align with the company’s financial health. Having a summary of profits and expenses can also make it easier to distribute profits to shareholders.
Additionally, you can include information like gross profits to determine the business earnings without expenses. Similarly, calculate ratios to identify areas consuming the profits and adopt cost-cutting measures. Besides this, profit and loss statements can also come in handy at the time of acquiring loans. Banks assess a company’s financial performance by looking at profit and loss statements to ensure you can repay the debt without any delays.
5. Budget for Taxes
You might be enjoying high business profits, but unfortunately, not all the money is yours. You have to hand over a small chunk of profits to the government as ‘tax.’ Depending on your income, it could be anywhere from 10%-37%. Instead of seeing taxes as a surprise at year-end, budget for taxes. If you have a savings account, set a little bit of income aside every month to pay the tax bill.
Furthermore, you must understand which taxes apply to you and your business. After all, tax regulations are different for sole proprietors, partnerships, and limited liability companies.
Believe it or not, finance is the backbone of every enterprise. Every entrepreneur has to brush up on money management and accounting skills to keep finances in order. From expenses, revenue, profits to inventory, you monitor every financial metric closely. Here, accounting know-how comes into play. You have to maintain records, prepare financials, monitor payments, and streamline the business’s financial health.