Five Tips for Handling Business Finances

How well you handle your business finances is vital to your success as a small business owner. Here are five key ways to effectively manage your finances.

1. Good record keeping. The starting point for managing finances is good record keeping of all revenue and expenditures. It is best to use an integrated financial software package such as QuickBooks, because all business transactions need to be recorded only once. In addition, software programs provide all the required business information in reports tailored for the specific business. If you are not able to use such a program, make sure that all records are kept in a single, easily accessible location and maintain a summary of file contents. It is imperative to maintain a separate bank account for your business. Personal income or expenses should never go into or come out of this account.

2. Revenue and expenditure budgeting. Budgeting will help to ensure that your business has enough cash for its operations. All revenue and expenditures need to be budgeted at least three months in advance to make sure there are adequate funds to run the business. In many businesses, the budget will be a part of a business plan. Existing businesses should create a budget using past history as a guide, and make modifications based on knowledge of specific circumstances and events which could cause variation from historical data. Keep in mind that budgets need to be flexible, as the assumptions on which the plan is based may change.

3. Cash flow and credit management. With a budget in place, you must manage cash flow by comparing actual revenue and expenditures with the budget. You will need to either provide additional cash or reduce expenditures if it seems that there might be a cash shortage at some point. If your business has employees, make sure that sufficient cash will be available to meet all obligations related to the handling of amounts withheld from employee paychecks, which must be passed on to government entities at some later date.

Effective management of customer credit (accounts receivable) is necessary to make certain your cash flow forecasts for receiving payments from customers will allow timely payment of your own expenses (accounts payable). Establish a standard policy for payment and make sure all customers granted credit are aware of it. If a customer is not paying invoices on time, find out why. It may have to do with a faulty product or poor service which needs to be corrected. Work out a payment plan acceptable to both parties and monitor closely.

4. Financial statement review. A regular review of financial statements helps with budgeting and cash flow forecasting. The three basic statements which should be prepared and reviewed every month are the balance sheet, the profit and loss statement and the cash flow statement. These statements will also be important if you need to get a loan to help with your cash flow.

5. Sufficient cash reserves. Sufficient cash reserves must be maintained so that the business is never in jeopardy because of some unexpected expenditure or shortage in expected revenue. Reserve funds should only be used in an emergency and should be replenished as soon as possible. Some reserve options include a CD, marketable security or even your personal borrowing ability so that money can be put into the business on a temporary basis if needed.

This overview of business finances gives you a good starting point, but sometimes it is best to consult with a professional. Seek help from SCORE Lancaster. To learn more visit our website at www.scorelancaster.org.

SCORE counseling is always free and confidential. In addition, SCORE provides many free, downloadable financial statements in its template gallery.