The sooner you get your business finances in order, the easier it will be for you down the road. It may seem like an extra step when you’re just trying to get people in the door, but those who take time to find their fiscal footing spend less time problem solving.
However, the good news is that you don’t have to have an MBA to do this right. Much of it is basic information that makes perfect sense once you get the hang of it.
Separation is Key
First and foremost, keep business and personal finances separate. This means getting a business bank account, a business credit card and treating your business from day one as if it’s something separate from you.
Why? Because you need to look professional and when everything runs through different avenues, you can actually see how your business is doing on its own. You’ll know what’s coming and going and whether or not your business is actually making a profit. Come tax time, it will all be easy because it will all be separated.
Many new business owners keep a personal account “for now” when they start. Two years later, they’re still using that personal account. Why? Because one transaction gets confused with another (for was that a coffee charge for a client or just your morning pick me up?) The sooner it’s all separated, the easier it will be down the line to not have to justify anything.
Document Everything (Yes, Everything)
Good habits are worth it now while practice makes perfect. It’s as simple as making a spreadsheet or working with accountants who can help you. But note every transaction.
While that may seem tedious now, soon it will become second nature, especially with modern accounting software helping businesses. Oftentimes they connect to your bank accounts and credit cards and pull transactions easily. You merely need to categorize them. Spending 20 minutes a week doing that is infinitely better than spending an entire weekend trying to recreate the week.
And your categories matter. Don’t stuff everything into “expenses.” Break it down—office supplies, marketing, professional services, equipment, travel. You’ll better see where your money goes and tax season will be simpler. Many growing businesses work with small business accountants from the start so they can set up these systems and know how to maintain them once busy.
Know Your Numbers
You don’t have to be a mathematical genius but recognizing specific numbers can help you make decisions. For example, knowing your profit margin can tell you how much money you’re actually making.
In addition, knowing cash flow—when money comes in compared to when it goes out—helps you understand that sometimes cash flow matters more than profits within the first year of business.
You should also check your numbers in intervals—at least once a month, but preferably weekly in those first few months. This way you’re not hyper vigilant over every cent; you’re just looking for trends. Are certain months slower than others? If so, next year you’ll know to plan ahead in those months instead of being blindsided by reality.
Many people avoid looking at their numbers because they’re scared of what they’ll find. But knowing what’s going on—even if it’s not good—will allow you to take action. Ignoring it won’t change reality.
Plan for Taxes Throughout the Year
Tax time is not the most wonderful time of the year. Your taxes will be best served if you view taxes as a year-long process instead of something that needs to get done all at once.
Whether it’s 25% or 30%, set aside a certain percentage of your income each month toward taxes so when it comes due, you’ve got it already covered. That way you’re not scrambling through money that should’ve been reserved for business expenses in the meantime.
Further, save receipts for everything that can be deductible. Camera phones are great to take photos of more easily accessible receipts for future use. Office supplies, equipment purchases, miles driven for work mileage, professional development (seminars not for teaching your own but learning how to grow), and even a portion of your home office if your work out of your house (if applicable) all help reduce your taxable income.
Knowing what you can and can’t deduct helps you save legally! There’s no reason for you to pay more taxes than what’s legally owed and if you stay on top of these items throughout the year, you’ll save yourself come tax time.
Build a Cash Reserve
This is difficult at first when every dollar you earn needs to be used; however, small reserves can help you for unexpected circumstances down the line.
If you can’t imagine saving three months’ worth of operating expenses, then don’t! Set a less aggressive goal—just enough to save for major repairs (for example). Once you have that reserve, try getting another one that totals three months. Even the thought of saving money gets in the way of excited venture capitalists who wonder if their dreams will ever come true but sometimes it’s better if they come true slowly instead of adding stress.
Business comes in lumps at times; with reserves comes breathing room during bad stretches as well as when opportunities arise.
Invest in Good Systems from Day One
Invest in accounting software, receipt processes and standards for how you invoice your clients for payments—all proactive measures you can take now will save effort later.
They don’t have to be expensive or even complicated; they just need to work consistently and reliable enough for how you actually operate. Something like appealing on paper but never used helps no one. Something easy that you’ll maintain gets the job done.
As your business grows, you can upgrade complexities, but starting off on the right foot means you’re setting yourself up for success instead of stumbling over an obstacle course while trying to find more sales.
Review What Works Quarterly
The foundation you’ve created will not be good forever without maintenance. If you’ve been successful on your own but are thinking about hiring someone else, good for you—but it means your foundations need review.
Quarterly assessments are warranted—or maybe monthly—and not in-depth ones but instead check-ins to see what’s working and what’s not and what needs tinkering.
Are prices still working? Are costs still making sense? Or are any numbers excessive? Are systems still right or is it time for change? And the sooner you can figure this out, the easier life will be before problems occur—small corrections are better than major fixes later on down the line.
The Ultimate Payoff
If building a fiscal foundation means you’ll be smarter and more secure down the line then so be it! The sooner you spend time getting this right the better you’ll feel by wanting to do this from day one instead of constantly fixing problems down the line.
The happiest businesses are those whose finances are at least organized enough so they don’t panic over challenges or miss out on opportunities because they can’t see them clearly through the chaos. It’s worth getting it right from day one!
