You’ve started a business—congratulations! Now you have to (or get to! 😉) manage your business’s finances. If you don’t have a background in finances, this task may feel a little daunting… or like the end of the world.
I work with new business owners all the time who started their business because they had a passion or saw a need, and that’s GREAT! Let that passion be your driver as you learn to manage your finances.
So, let’s get you from overwhelmed to killin’ it!
Dive Into Some Accounting Basics
When you run a business, you’ll simply have to learn a thing or two about accounting. Here are some of the fundamentals to help you get started:
- Open business bank accounts to keep the personal and business separate. Don’t let things get muddled from the start.
- Learn about your tax obligations and hiring a professional to help! If you can’t dedicate your time or mental energy to managing the accounting side, there are people who can help you! Hire a bookkeeper or accountant to keep things running smoothly.
Understand Your Business Expenses
Your business expenses will fall into one of two categories:
- Direct and indirect business expenses: direct expenses are the costs associated with the production of your goods or services (materials, labor, supplies). Indirect expenses are general business costs that keep you in operation, such as equipment utility expenses.
- Overhead costs: the costs you have to pay to stay in business no matter what you do.
- Fixed: expenses that are the same each month, like rent.
- Variable: expenses that increase or decrease depending on how your business is doing. Think commission-based employees or credit card fees.
- Semi-variable: expenses you choose to incur when your business is doing well, such as holiday promotions or added services.
Get to know your expense terminology, and you’re already ahead of the game! Understanding is half the battle.
Monitor Your Cash Flow
Having your documents and bookkeeping in order is great, but the real genius of managing your cash flow comes from using your bank accounts—as is the Profit First way.
This is especially important if your business is operating on thin profit margins. It’s not sustainable to rely on a big sale to come in to make ends meet each month. Plus, it’s always best to avoid emergency borrowing if you can.
Here are some of my top cash flow tips:
- Create a cash flow statement.This simply reflects the money that goes in and out of your business. Track the trends and adjust accordingly.
- Always use contractsALWAYS! A handshake is not the same as a signed piece of paper. Having terms for deliveries, payments, etc. can save you a lot of trouble in the long run.
- Manage Your Positive Vs. Negative Cash FlowPositive cash flow is when your business is making more money than you pay in expenses—this is where you want to stay! Negative cash flow is the opposite when your expenses outweigh your income. I use a payment collection system to keep cash flowing— Rotessa. Your clients/customers register with them, and the payments are pulled from their accounts automatically. No more chasing down payments!
Use the Profit First Method
The Profit First method is a mindset shift from the traditional formula (sales-expenses = profit) to sale-profit = expenses.
Now let’s get the Profit First method happening in your business. I like to explain it as the envelope method on steroids. You know, the system where you label your envelopes Rent, Groceries, Fun, and put cash into each of them to meet your needs. Well, this is like that, but with bank accounts.
For example, you may have your Owners Compensation Account, Income Account, Tax Account, and Profit Account. You can build on this or tweak it, but it simply reinforces the idea that every dollar you earn has a purpose.
Profit First puts a magnifying glass on your income and expenses to more efficiently and effectively manage your finances. Plus, one of the main goals of this method is to pay yourself FIRST. No more sacrificing your lifestyle for your business dreams. You can have both.
If all of this advice has still left you feeling a little daunted, that’s okay! It may just be time to get some help. No shame in that—financial coaches exist for a reason. If you’d like someone to help you on your business’s finance journey, book a 1-on-1 with me. Let’s get started and lift some of that weight off your shoulders.
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