Coach: Are you ready to go over your numbers?
Entrepreneur: Sure, business is GREAT. We are super busy!
Coach: How much income have you brought in this month?
Coach: What are your expenses?
Entrepreneur: Well, I think they were about $25,000. We have hit our goal of a 50-percent increase in sales, though.
This lack of understanding about checks and balances is not uncommon among successful businesspeople. Their specialty and laser focus are building the business. Prospecting and increasing sales? Yes. Bookkeeping and accounting? Not so much.
Coach: The expenses are about $25,000 or they are $25,000?
This was a portion of a real coaching call with a client whose goal is to increase revenue 50 percent every month—and he is nailing it! His opportunity comes from the fact that he is totally unaware of how much he is keeping. There is no system in place or software for recording his monthly expenses.
This lack of understanding about checks and balances is not uncommon among successful businesspeople. Their specialty and laser focus are building the business. Prospecting and increasing sales? Yes. Bookkeeping and accounting? Not so much. They have a rough idea of what their expenses are, sure, but they just don’t have the hard evidence.
Other times we see entrepreneurs and business owners hiring a financial person to take care of the books and trust they are doing their job of protecting the company, but then they don’t monitor that person. Chances are, they aren’t quite sure what to look for, so they trust the “expert.”
A best practice of every business owner—whether a solo entrepreneur or the leader of a larger organization—is to review income and expenses a minimum of once a month. Of course, this requires some sort of tracking system, either accounting software or even a ledger book. The key: If you don’t have a system, pick something and get started.
Let’s examine some of the key items you may want to incorporate into your business systems.
1. Get trained on finances
Depending on the size and type of your organization, you may have training in your industry on managing your finances. Local colleges offer accounting classes. The SBA (Small Business Association) near you offers training, often for free. Check out SBA.gov.
And here are some financial terms that are critical to understand:
Balance Sheet: Merriam Webster defines the balance sheet as a statement that shows the financial condition of a company at a particular time by listing the amount of money and property that the company has and the amount of money it owes. The balance sheet shows the resources of the company at a point in time.
Income Statement: This is a financial statement of a business showing the details of revenues, costs, expenses, losses, and profits for a given period. This is also referred to as a profit and loss statement. (P&L). In other words:
Revenue – Expenses = Net Income
The income statement shows the profit and loss of the company over a time period.
Cash Flow: The cash flow statement is a measure of an organization’s liquidity that usually consists of net income after taxes plus noncash charges against income. Your cash flow statement will answer the questions, ‘Where did the money come from and where did the money go?”
The cash flow statement shows real money flows during a time period.
2. Choose an accounting method.
There are two methods of accounting that are acceptable to the IRS: cash basis accounting and accrual basis accounting. InvestorGuide.com offers the following definition of each:
Cash basis: An accepted form of accounting that records all revenues and expenditures at the time when payments are actually received or sent. This straightforward method of accounting is appropriate for small or newer businesses that conduct business on a cash basis or that don’t carry inventories.
Accrual basis: An accepted form of accounting that reports income when earned and expenses when incurred. Under the accrual method, companies do have some discretion as to when income and expenses are recognized, but there are rules governing the recognition. In addition, companies are required to make prudent estimates against revenues that are recorded but may not be received, called a bad debt expense.
3. Select a software.
There are several options for accounting software. Some are industry-specific and there are programs such as Intuit QuickBooks, Xero, Wave Financial, and others. (You can read about each here.). If you’re not sure which to choose, consult with your accountant on which is the best match for your business requirements.
4. Get accounting help.
Hire a CPA or a bookkeeper. A bookkeeper has knowledge of the day-to-day record-keeping you need to run a lean and agile business but doesn’t possess the education and additional services a CPA can offer. Key areas you want your hire to have knowledge of includes, yet is not limited to:
- Accounts receivables
- Accounts payables
- Available cash
- Bank reconciliations
Now that we’ve covered the four basic steps to getting a handle on business expenses, it’s worth noting that knowing your numbers doesn’t stop here. If you don’t have a CPA or a bookkeeper managing the details, you’ll need to apply your own checks and balances. For example: One valuable report your software can generate is the trial balance detail. This report can be for a specific date range. Let’s say you were reviewing your trial balance detail for one month, and in one of the accounts, you notice you paid for a service you are no longer receiving. Now you can take action to stop the fees, putting money back in your pocket! Reviewing credit card statements and reconciling bank accounts monthly are other ways to watch for hidden expenses.
My challenge to you: Create a budget. If you don’t have a record of what you’ve expensed in the past, think about what you need to spend in the areas that contribute to your business, such as rent, salaries, marketing, supplies, etc. Depending on your business, you may have other categories to add or remove.
Monitor your income and expenses on a monthly basis, and even more frequently if you are not generating the income you intended; this may mean you have to curb spending. It will also help identify if it’s feasible to add a staff person, move to a larger office, etc.
Follow these basic principles and you’ll start to see more money in your pocket and more money you can reinvest in your business.