How to Get Better at Managing your Business Finances
As a small business owner, you know how important understanding the different aspects of your finances is for the success of your business. At VN Accountancy we are here to help you with all aspects of your accounting and bookkeeping needs but we also want to help you feel more confident with your accounts so understand the information you have.
First, so you can see all you need to know about how your business is doing, we will look at how to create a budget, monitor your cashflow and read the reports and statements you have. Next, we will take a look at budgeting - helping you to stay in the black and keep out of the red! Finally, we will talk about how to track your expenses - this information will also help with all of the above and when we come to do your books or tax returns for you.
Understanding Your Business Finance Basics
Create a Budget
This may sound more scary than it actually is! But as a starter, you need to create a list of all your business’s fixed and variable expenses, including rent, salaries, insurance, marketing expenses, utilities, cost of goods to sell, etc.
Knowing what your expenses are will give you a guide on how much money you need to bring in to cover costs. This information will also be an essential guide when making financial decisions, as well as broader, strategic decisions too.
Monitor your Cashflow
A cashflow forecast is a projection of the money you expect to come in and go out of your business in the future. Be realistic and honest and then ensure you keep a close eye on what actually comes in and goes out. As this changes, adjust your forecast to ensure that the business has enough cash on hand to meet its obligations.
Track Your Expenses
Tracking and monitoring your expenses is key to keeping in line with your budget. Ensure you keep accurate records as well as copies of all receipts & invoices. Not only is this information needed to help spot if you are overspending but also for your accountant to help you with respect to VAT returns and what you can and cannot claim for in your tax return.
Understand your Financial Statements
There are various Financial statements that you need to understand in order to run a successful business. These reports provide information about your company’s financial performance. They include the balance sheet, income statement and cashflow statement. They are often compiled for a full tax year (for example, the year ending 31st March), but they may be created for varying time periods - for example if you want to understand more detail every quarter / 3 months.
Balance Sheet
A Balance Sheet lists your business’s assets, liabilities and equity at a specific point in time. The assets section lists all the things the business owns. The liabilities section lists everything the company owes. The equity section shows the difference between assets and liabilities.
Income Statement:
The Income Statement shows your business’s revenues and expenses over a specific period of time. The revenues section shows how much money the company made. The expenses section shows how much money the company spent. The “bottom line” shows the company’s net income or loss.
Cashflow Statement
The Cashflow Statement shows much cash your business has coming in and going out over a specific period of time. Cashflow can come from three sources: operating activities shows the money coming in and going out from day-to-day operations; investing activities shows the money coming in and going out from investments the company made; and financing activities - the money coming in and going out from loans and other forms of financing.
Budgeting for your business
Budgeting is an essential tool for small business owners to plan and manage their finances effectively. Here’s a simple guide to help you create and manage a budget for your business. You will recognise many of the parts from above!
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. Include columns for each expense, the amount, and the frequency (so you always know when things are due).
Forecast sales and revenues
Forecast your sales and revenues for the upcoming period. How much do you expect to bring in? And therefore, how much can you afford to spend.
Set goals
Setting goals helps you focus on what is important and measure your progress - so you know if you are doing well and what you need to change / do more of. Examples of financial goals include increasing sales or reducing expenses.
Allocate funds
Allocate suitable amounts to different areas of your business, such as marketing, research and development, and other expenses. 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.
Review Regularly
At the end of the budget period, look back over all transactions and note any successes or challenges. Use this information to improve your budgeting for the next budget period.
Remember, you can (& should) be flexible and adjust your budget as needed, and don’t be afraid to seek advice from an accountant if you need help.
Expenses Tracking
We cannot express enough how important it is to track your expenses in order to manage your finances effectively. When you do this (& of course keep accurate records), you can see where your money is going and make informed decisions about your finances and the business. Be organised and consistent, and again, don’t be afraid to seek advice from an accountant if you need it.
Set up a system: whether it’s a spreadsheet, using a budgeting app, or a simple notebook, choose a system that works for you and that you’ll be able to maintain.
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.
Update regularly: at the end of each day or week, input everything that’s been spent and file your receipts & invoices. This will help you to stay on top of it and ensure your records are up to date.
Set up reminders: avoid late fees or panic by knowing when bills and payments are due.
Track credit card and bank statements: cross-check statements against your records to make sure that all expenses have been accounted for.
Review regularly: at least once a month, review the information recorded to identify areas where you may be overspending and to adjust spending if required.
Consider using 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 work with an accountant, have a chat with them about what they can recommend as they may have a system or accounting software you can use that will also help when it comes to preparing your accounts & tax returns.
Working with an accountant can help you better understand the financial aspects of your business and they will provide guidance on how to get better at managing your finances effectively. Don’t be afraid to ask as a good accountant will want to help and see your business thrive!
If you have any questions, why not get in touch with us to see what advice we can offer and how we can help!