Okay picture this: you’ve started your small business and you’re beginning to make sales and see some profit. Yay!
Now picture this: you’re seeing that profit come in but you have no idea how to keep track of it all and make sure all your expenses are getting paid. Now what?
Well, from working with tons of small business owners as a financial coach (and from starting my own business), I have compiled a list of best practices to ensure you can manage your profit effectively.
Without further ado, let’s get into it!
Choose a Bookkeeping System
When it comes to bookkeeping, you’ve got two main options to choose from:
- Accrual-based accounting records transactions as they happen. You record income at the point of sale, not when money changes hands. Similarly, you record expenses when they’ve been received, not when they’ve been paid for.
- Cash-based accounting is the simpler of the two methods, and is most commonly used for short business cycles with no inventory, farming, or fishing businesses. With this system, income is only considered revenue when it’s received. There is a downside to this method though—it only gives you a short-term picture of your finances. As your business grows, you’ll probably have to switch over to accrual-based accounting.
Picked a system? Great. Now it’s time to talk specifics.
Whether you’re using cash-based or accrual-based accounting, you’re going to need to follow a few key tips to stay on track:
- Use a schedule for your bookkeeping. You’re going to have a lot of financial information and responsibilities to keep track of, so it helps to have monthly and weekly systems and schedules in place. You’ll track and check on some things weekly, and some monthly.
- Record every expense. Every expense from your business account(s) should be accounted for with date, purpose, and amount. This goes for all payment methods.
- Pay yourself!! Make sure there’s a system in place for your own paycheque so that:
- Business and personal finances aren’t getting tangled together.
- You’re getting compensated for your hard work!
Feeling intimidated? Not to worry! There are tons of softwares and programs out there to help you get started! Put in the work to understand this now and you’ll thank yourself down the line as your business grows and your profit becomes more complex to manage.
Decide How You’re Going to Keep Records
By hand? With a spreadsheet? Software? A professional?
Your decision will depend on a myriad of factors. Do you have experience in keeping financial records? Are you a spreadsheet whiz? Do you feel comfortable managing your own books?
By hand will work if it’s where you feel most at ease, but it also leaves room for more errors. Same with a spreadsheet. With these you’re relying on human arithmetics and that’s not always reliable. Software can be the solution—as long as you’re ready and willing to learn a new program and make it work for you!
And, if doing the books isn’t your thing, there are lots of great reasons to hire a bookkeeper. Hiring a bookkeeper means things will get done correctly, carves out more time for you to spend focusing on sales, keeps you out of financial trouble, and even helps you get paid first!
Set Up Your Business Accounts
First of all: make sure you set up business accounts that are separate from your personal accounts. This will keep everything clear for things like taxes and credit.
The business accounts you open will reflect the type of business you’re in. For example, those who offer delivery services will probably need a Vehicles account, while those who operate online may need a Softwares account.
In general, small businesses open the following accounts to start:
- Chequing account
- Savings account
- Credit Card
- Payroll
- Accounts payable (money owed by the company)
- Accounts receivable (money owed to the company)
- Petty cash (on-hand cash)
Pretty much anything beyond that will be specific to you and your business.
The Profit First Method is a big fan of multiple accounts. That way, every time you make a sale you have a clear idea how to divide it to ensure you’re making all of your payments (including your own paycheque)!
Now, I have a little tip for you business owners. I would strongly advise you to open an account, nickname it Profit, and put 1% of each sale into that account. It will grow over time, and at the end of three months that money is yours to do whatever you want with. That’s your bonus, and that’s how you make sure you’re paying yourself what you deserve! As sales grow, so does that account balance and your compensation for your hard work.
Set Up Your Invoicing System
Develop a template (you can get one online or use a software system) and finesse it to make sure it includes your specific payment terms.
An invoicing system is important to ensure you’re getting paid from the get-go. Small businesses, especially service-based ones, will often offer credit to their customers. This means they provide the service first and invoice afterwards. Cash flow is incredibly important to a small business, so this can be a risky customer payment system.
If it’s working, great. But if not, let me suggest my method: Rotessa Payments. I use this third-party system to make sure I get paid on time every time. With permission and information provided by my clients, they take the payment from a designated account each time it’s due and deposit it into mine. No muss no fuss. I don’t have to bug people to get paid and my business’s cash flow stays healthy.
Store and Organize Your Receipts
If you can’t keep track of your transactions with customers, you’ve got no information basis for your finances. I would highly recommend going digital for this one. I’ll never pretend to know how you best manage your business’s information, but I will say a crumpled pile of physical receipts is not going to help you much.
Going digital with your receipts means you can customize the information and add as much context as you’d like to the transaction. Everything will stay organized and easy to find. And you won’t be left wondering “what was this person even paying for??”
That wasn’t so bad, was it? These simple steps will set an important foundation for your business’s finances as you move forward and GROW. Having profit to keep track of is a good problem to have!
And, if you need a little help getting started, getting educated, or untangling the mess, I’ve got you. Check out my group coaching courses or book a 1-on-1 with me to start building healthy financial habits. I look forward to connecting with you![/vc_column_text][/vc_column][/vc_row]