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The Newbie’s Guide To Managing Small Business Finances

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Running a small business is complicated. It’s easy to get caught up in its daily demands, but that’s not going to get it where you want it to go — your business’ financials have to do that. Before you can start using finances as the basis for business decisions, however, you need to know what to ask for and where to find it.

Small business finances 101

You might think you know who your best customer is and give that person or company the highest level of customer service. But a quantitative review of the situation might reveal the opposite, said Jaime Campbell, a CPA with an MBA in professional accounting from Rutgers University.

When you dig into the financials and look at that customer’s purchases versus the manpower, perks and other costs you spent on the product or service, you could realize that your best customer isn’t your most profitable customer, Campbell said.

“Numbers tell a story, including what’s working and what’s not working,” said Campbell, who is also a member of the North Carolina Association of Certified Public Accountants. “A business owner will not create a future without being clear about the present.”

Here’s a crash course on what you need to know.

Terms to know for small business finances

Financial discussions can sound like a foreign language to new business owners. But if you invest time in learning what the terms you’re hearing mean, you’ll know how to ask for the information that your business needs to grow. Here are some important terms that every new business owner should be familiar with:

Gross revenue vs. profit. Gross revenue represents a business’ total income. Subtract all its expenses from that number and that is your profit. It’s possible for a business to have a large gross revenue, but no profit. Mixing these terms up can make your business sound like it’s in worse — or way better — shape than it really is. “Being ambiguous with those terms will get you bad advice because you’re giving bad information,” Campbell said.

Cash accounting vs. accrual accounting. Campbell said accrual accounting lists revenue when it’s earned and expenses when they occur, regardless of the associated money’s location, which helps businesses focus on the future. Cash accounting records income and expenses when the money enters or leaves a business account. Because cash accounting is in real time, some business owners prefer it, she said. Well-designed accounting software allows you to toggle between the two. “You don’t have to choose one except for taxes,” Campbell said, when you use one or the other to base your taxes on.

Ratios. These describe a business’ performance and you can use it to compare with competitors’ or industry standards. Campbell recommends that new small business owners — especially those who used debt to start or grow — watch their current ratios, which compare total assets and current liabilities. Also called working capital ratios, they reveal how well a business can meet its short- and long-term obligations.

Profitability ratio, expressed as a percentage, is net income divided by revenue, and it shows how much of each dollar a business is earning. Gross margin is a company’s total sales revenue minus its cost of goods sold divided by total sales revenue. A percentage, it shows how much of sales a business keeps after paying for producing goods or services.

Internal controls. Mention this term to a CPA auditor and watch his or her eyes light up like a Christmas tree, Campbell said. These are policies and procedures that protect company assets. Keeping cash and blank checks in a safe that only the owner can open is one example of an internal control. “Trust is not an internal control,” she said.

Cash flow. This is the amount of money that enters and leaves a business during a period of time. If you collect more than you spend on short-term expenses, the business is cash-flow positive. If the situation is flipped, it’s cash-flow negative.

Break-even point. This is the point when a business earns enough revenue to cover all its expenses for a period of time, such as a quarter or year.

Expenses. These are the costs that a business incurs. Some, such as payroll, have a direct effect on cash flow, but others, such as depreciation, don’t. The IRS allows you to claim some as deductions — such as office supplies and equipment, travel and professional memberships — but they must be key to revenue generation and similar to ones other businesses in the same industry take.

EIN. The IRS issues businesses Employer Identification Numbers — also called Federal Tax Identification Numbers — for free. Some states issue them, too. You use an EIN like a Social Security number. If your business is located in the U.S. or one of its territories, the best way to apply for one is by visiting

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Documents you should understand

Once you learn the terms, you’ll need to familiarize yourself with the documents that track a business’s financial progress. Here are some of the most important ones:

Balance sheet. This document details what a company owns and owes and the investments made in it. It’s used to calculate rates of return and review what funding sources are being used to keep the doors open.

Income tax return. There are several ways you can structure a business, and each requires a different tax return. Familiarizing yourself with the one your business must use will help at tax time, Campbell said. The simplest businesses — sole proprietorships and single member, limited liability companies — don’t have a dedicated form. They report on a Schedule C, which attaches to the owner’s Form 1040. C corporations, which are taxed separately from their owners, use Form 1120, and S corps, which are taxed on their owners’ personal returns, use an 1120S. LLCs also use Form 1120. Limited liability partnerships, however, fill out Form 1065, and address profits and losses on the partners’ returns.

Bank statement. Campbell suggests taking a few minutes each month to review your business’ bank statement Ensure the deposits and withdrawals are accurate and verify that vendors have cashed their checks. If they haven’t, she suggests calling to see if they received them. If they didn’t, this proactive approach — which includes sending new checks — can go a long way toward preserving that business relationship.

Cash flow forecast. This document attempts to predict upcoming cash flow. It helps a business schedule large purchases during times of positive cash flow and arrange funds, possibly from a line of credit, when cash flow is expected to be negative.

Profit and loss statement. Also known as an income statement, this document shows revenue and expenses from operating and nonoperating activities, along with the net profit or loss for a specific period of time. It separates revenue and expenses in a business’ main operations from those in other areas.

Managing your books: DIY or hire an accountant

You can manage your small business’ finances two ways: Take them on yourself or hire an accountant or bookkeeper. Campbell said the choice comes down to what’s best for your business. Will it be better off with less of your time or the money you’ll have to pay someone to do them?

Pros and cons of hiring an accountant

Paying an accountant or bookkeeper to handle your financials frees up your time to manage and grow your business, Campbell said. The investment can protect your business, too. An experienced accountant or bookkeeper will know laws, requirements and best practices which vary among businesses and industries — better than most new business owners.

Accountant and bookkeepers are experts at looking into a business’s financial past and identifying errors, some of which can be costly, such as a vendor cashing a check twice, once by mobile upload and then at a bank counter, Campbell said.

These professionals look to the future, too. If your business is working with a new vendor, for example, the bookkeeper will know to request a W-9, and if not, withhold 28 percent from all payments. If the business were audited without a W-9 on file, you’d end up paying that withholding, even if you paid the vendor in full.

When you interview an accountant or bookkeeper, look for experience and knowledge that match what your business does. Campbell said the best ones are detail-oriented — ask the person you’re interviewing to talk about specific work examples that illustrate this characteristic.

Don’t use proximity to your office as a reason for hiring an accountant or bookkeeper. In today’s connected world, he or she can be based almost anywhere and still provide the level of service your business needs, said Campbell. In fact, her own accounting firm, based in Naples, Florida, helps small businesses nationwide.

If you hire a professional offsite, have vendors email invoices to him or her instead of you. Those who work on an outsourced basis tend to be more tech-savvy, she said. They’re working with multiple clients who might be far away, so they know how to securely send, for example, a W-9 or other document containing sensitive information like Social Security numbers.

Once your small business grows, you might want to consider hiring a corporate financial officer or outsourcing those responsibilities, Campbell said. This type of professional can use a business’ financials to look into its future and provide you with a financial map that shows the outcomes of doing business in different ways, pointing out the downsides, concerns and benefits along the way.

Pros and cons of DIY

Accounting is a big undertaking, but doing it yourself might be a good plan of attack for smaller businesses, Campbell said. The scope of functions a smaller business must conduct is often limited. If it is a sole proprietorship or single-member LLC, for example, your business won’t need payroll software.

If you do decide to manage your business’s finances, the U.S. Small Business Administration suggests you do the following:

  • Open a business checking account. Avoid mixing your personal and business finances.
  • Use an accurate and reliable means of tracking sales. You can do this with cash register tape, invoices or a sales book.
  • Deposit all sales, including cash ones. When you reconcile records, your deposits should equal your sales. Make a deposit for each revenue source, linking supporting documents to each. A small newspaper publisher, for example, might deposit all its circulation money on one deposit slip and all its advertising money on a second one.
  • Open a credit card in the business’s name. Use the detailed spending reports most card issuers provide as an easy way to track business expenses.

You or your staff will need training to navigate the DIY route. If you’re a true entrepreneur who is focused on developing business ideas, don’t waste time learning to enter financial information. “What you want to get trained on is how to use it,” Campbell said.

You could also mix DIY, hired help and an electronic environment for recording and tracking financial information, Campbell said. Although you might need someone to set up the computers and software and someone to review the compiled figures quarterly or annually, you or your staff will be responsible for inputting the information. It’s no different from paying another outside vendor, such as a web designer to build or update your internet presence.

Choosing accounting software

Accounting software is at the heart of every business’s financials. Not only does it store the information, it enables the owner to configure it in many ways, each offering a different perspective on the business and how to push it forward. How the business owner uses that information, Campbell said, will decide which software is best for that business. Most of the businesses her firm has worked with use one of three. Each has pluses and minuses:

  • QuickBooks Desktop: More than 4.3 million people use this popular software. Campbell, who wrote a book about using QuickBooks, said it has the capacity to manage finances for up to $30 million companies. It’s powerful, she said, but it’s not easy to functions. There are several versions of the program — more advanced ones offer more reports, including some that are industry-specific.
  • QuickBooks Online: This offers the same power as the desktop version but with the ability to easily add functions — payroll or payments, for example — due to the fact that it’s cloud-based. Like the desktop version, it interacts well with paper environments, Campbell said. You pay to use it on a monthly basis and your cost depends on your business structure.
  • Xero: A relative newcomer to the accounting software ranks, Xero has grown its use base to more than 1.3 million people in almost 200 countries since its release in 2006. You can customize its cloud-based software to any business, Campbell said. If also offers more than 500 plugins, including credit card processing and timekeeping. Consider this one if you expect your business to really grow or evolve, she said. If you start with one that’s adaptive, you won’t have to purchase a new system later.

Campbell recommends reviewing one more factor. If your business is in a rural community, where internet service might be spotty or not fast enough, a locally installed version of accounting software will be more reliable than one that’s cloud-based.

The bottom line

Financial information is crucial to run a successful business. “If it’s not [of quantity] or if it’s of bad quality, the business will die,” Campbell said.

To keep your business going, you must understand all of its associated terms and documents. Whether it’s best for your business to do the job yourself or hire it out, get a return on your investment by using compiled financial information to guide your business decisions. And choose accounting software that matches your business’ needs.

“There is no intrinsic value in accounting records,” Campbell said. Their only value comes with their implementation. “Every piece of info gleaned from a finance report must result in an action, or don’t bother,” she said.


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