Simplify Your Small Business Finances With These Tips

3 Effective Tips for Streamlining Small Business Finances

Simple, yet efficient small business finances are the foundation to any successful business model. As a small business owner, you do not need to be a financial expert to manage your company’s funds. However, there are basic tools and concepts that can be easily leveraged by professionals running a small business. 

To conduct successful small business finances, professionals need to take past numbers into account while balancing their company’s future strategy. Almost all small businesses can use bookkeeping software or accountants to their advantage when considering past financial success and shortcomings. 

Financial projections give small business owners a glimpse into the future. During a #BizHackLive webinar, Mike Lingle, founder of Rocket Pro Forma and an expert in financial projections for startups, encouraged small business owners to use a variety of financial tools when planning their small business finances. To learn how you can implement these methods and software into your business’s financial planning, keep reading. 


TL;DR: 3 Tips To Start Streamlining Your Small Business Finances

Many business owners hire accountants to do the numbers simply because they find them complicated or just downright confusing. But, as a small business owner, it is important for you to at least understand what goes into your small business finances.

  • Master financial tools and templates like income statements, cash flow statements, and a balance sheet. These tools allow you to stay on top of your small business finances and help you leverage your financial projections. 
  • Monitor your company’s debt and try your best to avoid accumulating debt. While there are ways to pay off money that you owe, at the end of the day, any money you spend paying off debt is money that you didn’t invest in your business.  
  • Leverage well-organized financial templates as you do your own bookkeeping. These methods allow you to stay organized and have a full understanding of your small business’ finances. 

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As you work to streamline your small business finances, there are several tools you can use to simplify the process. These tools for success include:

  • Finance basics, the simple concepts behind each step of your small business financing process. 
  • A mental map of your business, a road map that gives you direction when analyzing your financial projections and setting long-term goals. 
  • Research skills that allow you to evaluate the current market and take into account how your competitors are operating. 
  • A great template, the tool that allows you to apply basic financial concepts to your small business and its current state. There are unique characteristics that your company brings to the table that should be considered! 

When these tools are used well, small business owners can achieve financial success and take control of their small business finances


Learning the Financial Basics

As you begin to learn the basics of what goes into your small business finances, there are three critical tools you should understand. 

Income Statements, or a profit and loss (P&L) statement, use a basic formula to calculate your company’s profit. This formula is revenue – expenses = profit. However, this tool does not give you enough information to accurately assess your business’ profit, as it works on an accrual basis. Your income statement can be healthy, showing revenue coming in, but you are not able to collect it. 

There are several key performance indicators (KPIs) to monitor as you use your income statement. These metrics give you information on all of your transactions and intel on your company’s growth. 

  • The number of sales/subscribers /active users/$ Annual Recurring Revenue (ARR) or Monthly Recurring Revenue (MRR)
  • FTEs, or Full-Time Equivalents (employees)
  • Revenue per FTE 
  • Expenses per FTE

As you begin to monitor these various numbers, it is important to remember that the income statement is what any investor, accountant, or business mentor will want to see first. This tool is also what you will use to report to the government. While you begin to master small business finances, make maintaining a clean and concise income statement a priority. 

Cash Flow Statements fill in income statements’ gaps because they outline the tangible cash that your business currently has in its possession. Using this tool, small business owners can know exactly how much cash your company is earning and how much is exiting your business through expenses like employee salaries, rent, and supplies.

A Balance Sheet, the last of the three fundamental financial statements, shows all of your company’s assets and how these assets are financed. You can use this tool to calculate your small business’ net worth and evaluate your current financial position.

Once small business owners have an understanding of each of these critical statements, they can then begin deriving financial projections. 



Why Do We Need Financial Projections?

Financial projections are a tool you can use to gain insight into the future of your small business finances. There are numerous benefits to leveraging financial projections in your bookkeeping. 

  1. You can run your business effectively and efficiently because you know what to expect in the coming months and can plan accordingly.
  2. You can plan and hire with confidence because you are well aware of how much you can afford to pay your team. 
  3. You can handle problems that arise more smoothly if you understand the wiring of the business and where the money flows. Your financial projections make you better prepared to handle the unexpected!
  4. You can raise money to help your business grow because you have an in-depth understanding of your small business finances and can easily explain them to others. 

Having financial projections in place as part of your small business finances can help you avoid difficult situations such as having to let go of employees due to no budget or having no buffer during economically tough times.

But how do you create your small business’ financial projections? There are four stages to establishing your long-term financial plan. 

Stage 1: Pulling numbers out of thin air → At first, you may need to estimate your company’s key performance indicators. This is the first step to mastering your small business finances! As you continue operating, you will have more historical data to pull from. 

Stage 2: Researching likely answers → One of the best ways to learn is to draw on the work of others! Research your competitors’ businesses and their prices as you begin your financial projections. 

Stage 3: Adjusting as you run your business → As you continue to operate your business, you can monitor your financial projects to see if they match the real-life numbers. If they don’t, update your numbers. 

Stage 4: Mastery based on experience and data → The longer your business operates, the more historical data you can refer to as you continue to make your financial projections. After several years of conducting business, you’ll be a pro at measuring where your finances are headed! 

If all of this is new to you, the most important thing for you to do is build that mental model of your business. This is what is going to allow you to adjust as the landscape changes.


Debt Hurts Growth

Debt is a primary example of the issues small businesses can run into when planning their financial strategy. Even though there are methods professionals can use to combat debt, as a whole, debt payments are non-productive. Every debt payment you make is money you are not using to grow your business. 

“Debt gets expensive really, really quickly,” Lingle said.

What is even more critical to understand is that debt can only be paid back out of a small business’ profit. If a business is not making a profit, it is not clearing debt. In this scenario, the company is not generating any new income. Instead, it is simply moving the money it does have from place to place, a practice that isn’t sustainable in the long term. 

If you are battling debt, the bad news is, you can only pay back debt out of the profit your small business generates. The good news is that you can allocate your money in different ways, meaning that you can find debt that costs your company a lower rate. By finding reduced interest rates, pushing past payments, and applying for grants, you can put off paying for your debt until you are in a better financial position. However, you will eventually need to pay back your debt in full.


The Financial Template

Using these tools, small business owners can master their company’s finances by using a well-kept financial template. This method allows you to keep your small business finances in check and prevent the panic that comes with feeling clueless about your finances! 

Lingle shared his fool-proof financial template that has helped numerous small businesses master their finances. By using these helpful resources, tips, and tricks, any small business owner will be ready to keep their finances organized and easy to understand. 

It is important to remember expenses are real, revenue is imaginary. Even if you have 12 months of data, something can happen in the world this month, very much like COVID-19 did in April 2020, and stop the revenue cold while your expenses keep moving forward. Understanding your small business finances, where you currently are financially, where you are projected to be in the next few months, and making sure you have a buffer to have some ability to adjust is very important if you want to have a sustainable business. Use these tips for streamlined small business finances to ensure you are ready for anywhere your company takes you!

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