Your finances tell the story of your business. They show the areas of your business that bring in profits and those that deliver a blow to your bottom line. When you remain in the dark about what your finances mean, you limit your success. You may also just have an expensive hobby and not a real business. When you get a better understanding of your small business finances, you will sleep better at night. You may also find new opportunities you might have missed. Use these tips to get a grasp on your small business finances.
Keep Detailed Records of Your Expenses
You know as well as I do – running a business costs money. You have supplies, bills, and marketing efforts as well as other daily cash expenses that drain your business bank account. Most of these investments are necessary to help you put more toward your bottom line and boost sales. However, without a solid understanding of where your cash is going, you have no way of knowing whether you are overspending or not spending enough.
Focus on the 15th of the month
By the 15th of the month you should know how well you business did the month prior. You should be using an accounting system that automatically pulls your expenses from your bank account, and make sure to review your profit and loss statement, cash flow statement and balance sheet, so that you know what is going on. If you are not sure how to read these documents get your accountant or a business advisor to teach you.
Take Your Assets Into Consideration
Running a business also requires the use of certain assets. For example, your computer, printers, inventory and machinery all require a significant investment.
Assets and capital in your business impact your finances more than you might realize. Each year your assets depreciate, which can provide you with a tax break, putting more money back into your pocket. In addition, if you’re ever in a pinch, you might have the chance to sell your assets to bring in more money without having to seek outside capital. Keeping these investments in mind will help you have a stronger grasp on your finances.
Don’t skimp when it comes to investing in assets. You need computers and tools that you can rely on, and won’t break when you need them most.
Get Familiar With Your Payroll
Payroll is a catch 22. You need a strong team to help you produce stellar results for your clients. However, keeping highly skilled team members on your payroll costs you money. Getting familiar with your payroll details helps you to know who’s getting your money and who is costing you the most money.
While you review this information, it is important to consider how each person on your payroll earns a paycheck. For example, sales teams often earn their paychecks based on commission. If you consistently cut high checks for your sales team, you know you’re getting the revenues to justify the payroll expense. Use timesheets to track the time of your non-revenue generating employees. When you understand your human capital investments, you get a clearer idea of how each team member, contractor, or department impacts your business.
Review All Cash Flows
Once you have watched your money fly out the window with expenses and capital, it’s time to review how all of your investments pay off. Reviewing your cash flow gives you a clear idea of where you’re making the most money. It also shows you areas of your business that might not generate as much income as you originally expected. When you have a clearer understanding of where you’re making your money (and where you’re not) you can adjust your strategy, revise your plan, and focus more of your efforts on income generating tasks.
Reviewing these five key areas will give you a better understanding of your finances, and help you ensure your business runs like a lean, mean, profit-generating machine.