Understanding the different aspects of your finances is crucial for the success of your business. In this post, we’ll look at how to get better at managing your business finances in three ways. First, we’ll look at the basics: creating a budget, monitoring your cashflow, and understanding the reports and statements that tell you all you need to know about how the business is doing. Second, we’ll go through a step-by-step guide to budgeting, staying in the black and out of the red. Third, we’ll cover how to track your expenses.
1 – Business Finance Basics
Create a Budget
List out all your business’s fixed and variable expenses, such as rent, salaries, marketing expenses, cost of goods to sell, and anything else. This will show you how much money you need to bring in to cover the cost of the business, and it will act as an essential guide to you in making financial decisions, and broader, strategic business ones as well. (More on this in the second section of this post).
Monitor your Cashflow
Create a cashflow forecast, which is a projection of the money you expect to come in and go out of your business in the future. Keep a close eye on what actually comes in and goes out, and make adjustments as necessary to ensure that the business has enough cash on hand to meet its obligations.
Track Your Expenses
Keep accurate records of all your expenses and monitor them regularly to ensure they are in line with the budget. This will help you identify areas where you may be overspending and make adjustments as needed. (More on this in part 3).
Understand your Financial Statements
Financial statements are reports that provide information about your company’s financial performance and position. The most important financial statements for a small business are the balance sheet, income statement and cashflow statement.
Your Balance Sheet: this shows your business’s assets, liabilities and equity at a specific point in time. To read a balance sheet, start by looking at the assets section, which lists all the things business owns. Next, look at the liabilities section, which lists everything the company owes. Finally, look at the equity section, which shows the difference between assets and liabilities.
Your Income Statement: this shows your business’s revenues and expenses over a specific period of time. To read an income statement, start by looking at the revenues section, which shows how much money the company made. Next, look at the expenses section, which shows how much money the company spent. Finally, look at the bottom line, which shows the company’s net income or loss.
Your Cashflow Statement: this show much cash your business has coming in and going out over a specific period of time. To read a cashflow statement, start by looking at the cashflow from operating activities, which shows the money coming in and going out from the company’s day-to-day operations. Next, look at the cashflow from investing activities, which shows the money coming in and going out from investments the company made. Finally, look at the cashflow from financing activities, which shows the money coming in and going out from loans and other forms of financing.
2 – Budgeting
Budgeting is an essential tool for small business owners to plan and manage their finances effectively. Here’s a step-by-step guide to help you create and manage a budget for your small business.
Gather financial information
Collect all of the financial information for your business, including past financial statements, invoices, bills, and other financial records. This will give you a clear picture of your current financial situation and help you identify trends and patterns.
Identify fixed and variable expenses
Fixed expenses are the ones that remain the same each month, such as rent and salaries. Variable expenses are the ones that change each month, such as utilities and marketing costs. Identify all of them so you know what to expect, and create a spreadsheet that lists them all out. You can use a pre-made template or create one from scratch. Make sure to include columns for each expense, the amount, and the frequency.
Forecast sales and revenues
Forecast your sales and revenues for the upcoming budget period. This will help you to identify how much money you can expect to bring in and plan your expenses accordingly.
Whether it’s increasing sales or reducing expenses, or both, set financial goals for your business. They will help you to focus on what is important and measure your progress.
Allocate suitable amounts to different areas of your business, such as marketing, research and development, and other expenses. Make sure you prioritise your expenses based on the goals you set and the amount of money you have available.
Monitor and adjust
Keep track of your actual expenses and compare them to the expenses you expected to have when you created your budget – and do the same for the money you have coming in. Identify areas where you may be over- or under-budget and make adjustments accordingly.
At the end of the budget period, look back over all transactions and note any successes or challenges. Use this business intelligence to improve your budgeting for the next budget period.
Remember to be flexible and adjust your budget as needed, and don’t be afraid to seek advice from a financial advisor or accountant if you need help.
3 – Expenses Tracking
This is an essential task for managing your finances effectively. When you track your expenses regularly and keep accurate records, you can see where your money is going and make informed decisions about your finances and the business as a whole. Remember to stay organised and consistent, and don’t be afraid to seek advice from a financial advisor or accountant if you need it.
Set up a system: whether it’s an Excel spreadsheet, a budgeting app, or a simple notebook, choose a system that works for you and that you’ll be able to maintain over time.
Categorise expenses: put all your expenses into different categories, such as rent, salaries, marketing expenses, and more. This will help you to see where your money is going and identify areas where you may be overspending.
Keep receipts and invoices: this will help you to verify expenses and provide documentation if needed.
Enter expenses regularly: at the end of each day or week, input everything that’s been spent. This will help you to stay on top of it all and ensure that your records are up to date.
Set up alerts: knowing when bills and payments due will help you to stay on top of expenses and avoid late fees.
Track credit card and bank statements: this will allow you to cross-check them against your records and make sure that all expenses are accounted for.
Review expenses regularly: take stock of your expenses spending at least once a month, to identify areas where you may be overspending. Use this information to make adjustments to your budget as needed.
Use software or apps: many of these processes can be automated with expense tracking software or apps, saving you time and giving you more accurate data.
If you have any doubts or questions about any aspect of your business’s finances, don’t hesitate to seek advice from a financial advisor or accountant. They can help you better understand the financial aspects of your business and provide guidance on how to get better at managing your finances effectively. Sharing good practice with other business owners is also a great way to get support – something we love to do at The Business Spa!