- Open multiple bank accounts
We log into our personal bank accounts once a week or sometimes even as often as once a day because we want to know how much cash we have in the bank. Once we see how much money we have, we make decisions about what and how much we spend during week or that day. Now, this may work in our personal lives, but this method is terribly dangerous to use in your business. The repercussions of this method are that we end up with low balance checking accounts and wonder where our cash has gone? This happens because we make decisions on the spot about money and we don’t think about future obligations or expenses we might incur in our business. A great way to avoid doing this is by opening multiple bank accounts at your banking institution. Each bank account should have a designated name for spending, for example-sales tax, payroll, taxes, and revenue. Setting up your bank accounts this way allows you to better manage your cash and plan. After implementing this, you would have a clear cash dashboard of your business. The cash dashboard helps you gain financial visibility because you can see exactly where your business stands at any point in time from a cash prospective.
2. Personal vs Business
It’s important to separate your business expenses from your personal expenses so that you have a clear picture of how your business is operating. You should open a business checking account so that you can keep track of your business revenue and expenses. I recommend opening a business checking account at one of the big financial institutions such as Chase because although they have a monthly service fee it’s worth the money because they clear checks, EFTPS, and ACH transfers within a couple of hours or the next day. This is especially important for those businesses just starting out where having cash readily available is key.
Most business expenses are tax deductible which is another reason to keep track of business expenses. Personal expenses on the other hand are not tax deductible and if the two are commingled it could get difficult to determine what is tax deductible. If you need money for personal expenses you should transfer the cash from your business account to your personal account. You should ask your bookkeeper or CPA if this method would work depending on the tax structure of your business.
How could you possibly know how your business is doing financially if your personal and business transactions are comingled. You can’t, gain financial clarity by separating business and personal expenses. Running a business is difficult enough but having organized books and knowing where your business stands financially helps alleviate some of those difficult management decisions.
3. Key Monthly Financial Reports
Income Statement
Having a basic understanding of financial reports is a must for any business owner. If you acquire a basic understanding of your financial statements, it will help you detect problem areas within your business. The first financial statement you need to know is the Income Statement also known as a Profit and Loss Statement (P&L). The Profit and Loss Statement shows revenue and expense accounts used in your business. It is important to compare prior-month revenue and expenses to your current month’s revenue and expenses. Analyze any changes you incur from month to month and understand why the change is happening. For example, if advertising cost increased then you can expect that a percentage of income will increase as well. The numbers on your Profit and Loss Statement tell a story, understand what they are saying, and you’ll be able to make better business decisions.
Balance Sheet
The next important financial statement is your Balance Sheet, which shows the financial position of your company at a given time. A balance sheet contains 5 categories including current assets, long-term assets, current liabilities, long-term liabilities, and equity. In the current assets section, you will see accounts that are highly liquid and have a maturity of less than 12 months such as cash, bank accounts, accounts receivable (AR), and inventory. Long-term assets are assets that are not expected to be converted into cash or consumed within 1 year, including long-term investments, intangibles, and PPE (property, plant, and equipment). Current liabilities are debts that are due in less than 1 year, these accounts are called accounts payable (AP), interest payable, sales tax payable, income tax payable, and accrued expenses. Long-term liabilities are debts that are not due within 1 year, including mortgage payable, shareholder loans, bonds payable, capital leases, pension liabilities, and deferred income taxes. Equity accounts are a financial representation of the ownership of your business which contains transactions coming from contributions and distributions to owners of the business. Analyzing your balance sheet on a monthly basis can help you evaluate upcoming debts, cash position, and revenue that is yet to be collected.
Cash Flow Statement
One of the most important financial statements to look over more than once a month would be your cash flow statement. The cash flow statement contains all cash inflows and outflows for the given period. The cash flow statement is broken down into three categories – operating activities, investing activities, and financing activities. The operating activities section shows cash flow from the daily operations of the business. The investing activities section contains any cash flow activities that relate to cash spent or sale proceeds on equipment, furniture, property, and investments. The financing section reflects cash flow from debt and equity such as contributions from owners to the business and payments or funds received from loans in order to finance the business. The sum of cash flow from operating, investing, and financing activities is called your net cash flow. This statement will help you evaluate whether your business is currently operating with enough cash in the bank. Most importantly, knowing your cash flow can help you project future cash flows and know whether your company is able to generate enough cash flow for operational growth.
4. Choose the right software
There are many bookkeeping software choices out there that you can pick from, but it’s important that your business-needs align with the software capabilities. If you’re in the e-commerce space, there are many implications to consider with selling online for example, sales tax, point of sale integrations, and customized reports specific to your needs. For e-commerce sellers, QuickBooks is a great choice because it includes features like- payment support so you can pay your Shopify or PayPal expenses, automatic daily sync allows you to import all of your orders and refunds, and it integrates with many ecommerce platforms.
Digital marketing agencies and advertising agencies require unique financial reports that allow them to track revenue and expenses accurately. You require real-time financial information to help you track your growth and plan. Sage Intacct is perfect for this because it has features project accounting that allows you to set up projects from your CRM system, map vendor invoices to individual campaigns and projects, automate project billing, and streamline multi-entity consolidation.
It’s important to take the time to research the different features of each an accounting system to make sure that it can support your business needs.