Managing your small business finances 101

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Managing your small business finances 101

If you run your own enterprise, there’s a good chance that going into business had a lot to do with money. But once you’re actually in business, finances can pretty quickly become overwhelming. So grab a notebook, and set aside a couple of minutes, because we’re starting with basics and breaking down everything you need to know. Here’s our Small Business Finance Management 101!

Writing In Notebook

Step one: know why finances matter!

Let’s be honest, we’re all guilty of neglecting areas of our businesses or lives that we don’t quite understand, so why is it so important to stay on top of your business finances? Managing your small business finances will allow you to:

  • Track business performance
  • Ensure you have enough money to cover expenses
  • Give you the information to make spending decisions
  • Keep excellent records which will be required if you are writing a business plan, approaching investors, or securing loans

And perhaps the most helpful, as it is often the most hated:

  • Simplify tax time!

Step two: put together these four reports

To manage your business finances, there are four essential tools/reports you need to put together. Combined, these reports will give you a snapshot of what your business finances are up to in any area, at any point in the game. You can keep these reports as excel spreadsheets, documents, or using the built-in tools from your favourite accounting app. Whatever works best for you. The awesome foursome are:

1. Budget

A budget forecasts all foreseeable upcoming expenses for a period and anticipates income needed to cover those. Keeping a budget will allow you to plan for your finances and designate funds for the expenses you have.

2. Cashflow statement

A cashflow statement sounds intimidating, but it really isn’t. It is essentially a report of how money is flowing through your business, cash coming in and cash going out. A business with a positive cashflow has enough money coming in to cover all expenses and start netting a profit. A business with a negative cashflow is not making enough income to cover expenses yet, so you may be relying on a business loan, grant, or funding from investment to cover expenses at this time.

3. Income statement

Also know as a “Profit and Loss Statement”, the income statement shows whether you made a profit or loss for the year. It tracks whether your income was enough to cover your expenses with some left over (the business made a profit), or whether you were unable to meet your expenses with income alone (the business made a loss).

4. Balance sheet

The balance sheet provides a snapshot of a business’s financial position at any point in time. It lists what you owe compared to a list of what you own.

Step four: avoid these common mistakes

Mistakes happen, but before you get yourself into a tangle that will have your accountant pulling their hair out, here are common mistakes to avoid:

  • Not invoicing on time and not chasing up debtors. This can have a major effect on your cashflow.
  • Spending money in the business bank account without realising it’s needed for upcoming expenses. Avoid this by keeping a budget and actually following it.
  • Not getting advice when you really need it. Don’t be afraid to reach out. Finances are tricky, and there are so many different areas in which trained financial advisors can help you simplify everything. You don’t have to do it all yourself!

Step five: hot tips

Now that you’ve arranged your newly organised finances into a simple system, here are our hot tips for staying on top of managing your money:

  • Set up a business bank account, separate from any personal accounts
  • Keep accurate records and use apps and tools to keep an electronic record of receipts and invoices as well as storing the physical copies safely. Xero and Receiptbank are are go-to resources here.
  • Set aside a portion of the business income every week/month to cover taxes

Step six: get help

You don’t need to do it all alone. Now you have a good understanding of how finance management works, get help with any of it from trained professionals. Getting financial advice is a smart business decision and will pay dividends back on the expense by helping you understand how to best manage your finances, subsequently saving you time and money!

Check out this business.govt.nz article for some extra tips:

Getting financial advice

Step seven: celebrate your financial management prowess!

Phew, you made it! If you’re still with us, congratulations on getting through this masterclass. Give yourself a pat on the back for getting started on finances. You probably deserve a wine.

If you’re hungry for more, we recommend the following business.govt.nz article as light reading. We’ve heard business finance readings pair well with a Pinot…

Systems that can help at tax time

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