5 Must Have Tools To Manage Your Small Business Finances

5 financial tools your business can't live without. These tools will improve and significantly upgrade your financial management process.

Accounting System

Most businesses start off by using excel to track their income and expenses. While this may work in the beginning, it’s certainly not a tool I recommend as you continue to grow and evolve. There are certain insights and data that you can’t get from excel especially if you’re in DIY mode. My software of choice is Quickbooks Online which is used by a large number of small business owners. I specifically love it because of its functionality, integrations, and accessibility. It also has the ability to grow and scale with you. From a 1 firm owner to a full team, you can continue using the system while adding your accountant (once you hire one).

Cash Flow Tool/Benchmark

Cash flow issues are cited as one of the main reasons that small businesses go under. It’s important to track your cash flow and have a clear understanding of how money flows in and out of your business. There are multiple tools to assist you with this. Our current application of choice is Fathom HQ. Using this tool allows us to analyze where cash is going, is it diminishing, will the client run out of it and when, is it sustainable, etc. These are the types of questions you should be asking yourself when you’re doing a financial review which at the minimum should be monthly.

Along with cash flow analysis is benchmarking. By benchmarking you can see how your company is performing alongside others in the industry. Fathom HQ also provides this level of analysis. As a result, you can easily determine where you are under or over performing, review non-financial performance indicators, and more.

Invoicing

No money in means you aren’t running a business. A past client of mine came to me due to struggles with cash flow. They knew they were making money but somehow seemed to be cash strapped often. The issue was a lack of process around invoicing and collecting receivables. You need to collect on time and have convenient methods of payment. If you’re using QuickBooks, you can take advantage of automating your invoicing process. Furthermore, you can use Intuit’s Merchant Services to accept credit cards, debit cards, and ACH Payments. Payments can be made online or by phone and you can set up clients to be charged on a recurring basis. Lastly, the collections process (if you’re not paid on time) can also be automated. 

By implementing a seamless process for my client, they were able to find comfort in knowing customers/clients were being invoiced on time, the need to track down payments was reduced, and clients were happy with having more options to pay.  

Expense Management

Depending on the nature and size of your business you may or may not need an additional tool for expense management. If you’re looking for a way to streamline expense management for and your employees, Expensify is a great tool. It reduces the need to create a stack of paper receipts, reduces paperwork, and streamlines the expense reporting and approval process. Less work for you and a streamlined process for reporting.

Time Sheets

Time tracking and payroll are a constant concern for small business owners. It’s no wonder that more and more businesses have moved away from manually reporting time. Our favorite software of choice is TSheets. Using an automated system reduces the ability to “steal” time and also makes job costing easier. The great thing about TSheets is that it also integrates with Quickbooks online. Some of the features include GPS tracking, a mobile app, the ability to create schedules, and integration with not only your bookkeeping system but payroll as well.

These are just a few systems that we use with our clients and that help to effectively manage small business finances. These are all apart of the back office solution we provide to create a streamlined financial process. If your business operations are manual and causing bottlenecks, I encourage you to schedule a consult here.

Accounting 101 for Small Business Owners

Normally when you work for an employer, you fill out your w-4 with your preferred exemptions, you provide your checking account information for direct deposit, and then you go about your business. Then between your manager, human resources, the accounting, and payroll department the rest gets handled. But, what if YOU'RE the employer; you work for yourself and you're unsure of how to manage your finances. Believe it or not, there are actually quite a few mistakes made by those who are in business for themselves. A few are:

  • Not having a functional system for organizing finances

  • Lack of a basic understanding of taxes and how they apply to your business

  • Not keeping up with expenses

  • Co-mingling business and personal funds

  • Not knowing when to enlist the help of a professional

It's impossible to teach you all you need to know about your setting up your business in one post. However, I'm going to go over some basic info.

Business Type

Before getting into the details of your business, you have to determine how your business is going to run. There are different types of business entities (Sole Proprietorship, Partnership, LLC, S-Corporation, Corporation, etc.) that you can choose from. Each business type operates differently in reference to liability, tax implications, pay structure, etc.

If you are a freelancer or creative entrepreneur, the most common business types to choose from are an LLC and Sole Proprietorship. Check out What's The Difference Between an LLC and Sole Proprietorship for an explanation of the two. I personally prefer to stay away from Sole proprietorships because under this entity, you and your business are seen as one. Mainly for liability purposes, I prefer for my business to be a separate legal entity.

One of the biggest reasons to make sure that your business is seen as a separate entity from you as a person is due to the protection that comes when you make a legal distinction (InvestorJunkie).

Take the time to understand which type is best for your business or enlist the help of a professional (attorney or accountant) to make sure that you get started on the right foot.

Separate Bank Accounts

Keeping your personal bank account separate from your business account is a key aspect to operating your business, whether it's a side hustle or full-time business. When the time comes to file taxes, you will be able to easily distinguish your business expenses which can help with determining the tax write-offs and deductions you qualify for. For certain business expenses, you will be required to provide support and it can get very messy if you haven't been keeping track.

Also, depending on the type of business you've selected, there are legal implications when co-mingling funds. For the sake of being organized, keeping good records, and being professional; don't mix the two. Lastly, if you've taken the step to open a Business account be sure not to use this account for personal purchases. It's important for the IRS to be able to see the difference.

Track Income and Expenses

Part of being an efficient owner is having a system in place so that the processes that keep your business running are doing so seamlessly. Tracking income and expenses is crucial to your business. By doing so you are able to tell how well your business is doing and in what areas you can improve. Having a complete picture also helps you to budget and create future financial plans. When starting out, business owners may choose to go the manual route, however we are in the day and age of technology and there quite a few apps and cloud accounting software that can help you streamline this process.

Create A Process

When you first start out it may seem like you can take on business tasks here and there. As you begin to grow, you will need to have a process in place so that your business runs smoothly. Your process will be specific as to how you work and the nature of your business. However, having one in place will reduce stress and help you to remain organized. Some things to think about:

  • When and how will you organize documents?

  • How will you send invoices? At what point will you follow-up on unpaid items?

  • How often will you read and follow-up on emails?

  • When will analytics be reviewed?

  • Will you sit with your accountant to go over your financial progress and areas for growth?

These are just a few general examples. Take a moment to breakdown your business and create a process that will help it run efficiently.

Set Aside Money for Taxes

Taxes usually give entrepreneurs the biggest headache. If you've made more than $400 in revenue within the year, the IRS sees you as a business and tax rules will apply. If you are working for yourself, taxes are not being deducted from the income you are earning.

For this reason, you may end up owing the IRS when you file taxes. In order to combat this, it's best to write off as much of your business expenses that you can and take advantage of any tax deductions you qualify for. Hence why it's important to track your income and expenses. It is highly recommended to incorporate taxes into your budget, estimate your taxes, and pay on a quarterly basis. Now there is a requirement which can be found in detail at Estimated Taxes. If you aren't familiar with taxes, it would be wise and less stressful to consider hiring a professional.

Organize Financial Documents

As a one stop shop for your business, you will have a lot of information at your fingertips such as receipts, invoices, contracts, bank records, tax returns, etc. I cannot stress enough how important it is to have a system of how you will organize your documents. The best way I have found to organize my documents are:

  • Expanding folder for paper copies of receipts

  • Steel File Cabinet (with key) for client files and vendor documents

  • Electronic folders of my desktop for soft copies of records

  • Label, color code, file tabs as needed

The specific documents that you keep will vary dependent on your business type. However, there are certain records that most if not all entrepreneurs have to keep. What does the IRS say? Check out What kind of records should I keep

When Is It Time To Enlist a Professional?

You may be wondering when is the best time to outsource certain areas of your business function. When it comes to your business finances, ask yourself these questions:

  • Are you spending too much time sorting out your finances?

    1. Is accounting getting in the way of your creativity?

    2. Are you familiar with taxes?

    3. Is accounting a strong point for you?

  • Is it more valuable to spend time focusing on your business or on accounting?

If you find that your answers to these questions have creeped you out or you spent too much time pondering the answers, it may be time to let go of your financial headache and leave it to a professional so that you can get back to being creative. I can help relieve some of that by implementing a process for you to follow and manage day to day. Check HERE for services provided.

The Difference Between an LLC and Sole Proprietorship

A common question that I'm often asked is what business entity should  a person choose when starting a business. In most cases, creative entrepreneurs choose between forming an LLC or they decide to go with a Sole Proprietorship. While a Sole Proprietorship is the simplest entity to form, an LLC provides a layer of liability protection. Let's dive into the differences.

Formation

A sole proprietorship is an unincorporated form of business run by one person (the business owner). There is no separation between the business and the person, it is seen by the IRS as one. Formal action is not required, it is assumed once business activities start to take place. This type of business entity is very common among freelancers. In contrast, an LLC requires you to file Articles of Organization and depending on the state, has specific registration requirements. More importantly, the IRS views the LLC as a separate legal entity. This business will have its own tax id number and business activities can occur under its own name.

Liability

The biggest difference in the two forms of businesses is the area of liability. As a sole proprietor, you are personally responsible for all debts incurred as well as any conflicts that may arise. There is no separation between you and your business. In the event that a creditor or customer wanted to come after the business, you will personally he held responsible. This also extends to liabilities that may occur on behalf of employees. As an LLC, under most circumstances you have no personal liability. Generally when creditors or customers go into business with you, they are working with the LLC not you personally. Should an issue arise, the issue is with the LLC and not you personally.

Ownership

Under a sole proprietorship, there is one owner, you. You call the shots and make the decisions. You are also the go-to person (unless otherwise designated) that people will go to when there are questions, issues, or concerns. As an LLC, this type of business can be formed by one person or by more than one owner (also called members). You can set how you want the business to run and how profits and losses will be split in the Articles of Organization.

Existence

As the sole owner of a business, the life of your business is only as long as your life span (harsh, right?). If it is your hope to build a legacy or to expand and have your business around even after you're gone, this may not be the best type of entity for you. On the other hand, LLCs can have term life or perpetual life. The longevity of the business depends on the Articles of Organization. Normally, the owners (members) determine the duration period at the time of formation. If the duration period is not specified, the LLC is assumed to have perpetuity. In the event that the LLC is perpetual, the business will dissolve once a member disassociates or once a member files a certificate of cancellation or dissolution.

Taxes

Before you get in an uproar, let me make it plain for you. As a sole proprietor, you will report your business income and losses on your personal tax return. In addition to the 1040 form filed, Schedule C will be filed to account for your business profits or losses. Being organized and tracking your expenses come into play here if you want to deduct business expenses and claim certain write-offs. As I mentioned in Accounting 101 for The Creative Entrepreneur, when you don't have an employer deducting taxes from your income, you will still be liable to pay taxes. In order to lighten the tax burden and to comply with IRS regulations, you can estimate your taxes and pay them quarterly (if required).

Although an LLC is a separate legal entity, it is not a separate tax entity. For the sake of taxes, the LLC can be treated as a sole proprietorship or a partnership. If you own a multi-member LLC, all owners report their share of the business profits and losses of the LLC on their personal tax return. In addition to the 1040 form filed, each member files Schedule K-1 which shows each members share of the profits and losses.

How do you know what's best for your business?

The answer is dependent on the owner and the type of business they want to run; there is no right or wrong answer. However, if you plan to grow your business, have it operating without your day to day direction, or if you don't want your personal assets at risk, you should create the business as a separate entity.

If you are a business owner, what entity did you choose and why?

The Difference Between Bookkeepers and Accountants

Some people tend to use the terms Bookkeeper and Accountant interchangeably. These two professions are connected but there are noticeable differences. When determining the type of services your business needs, be sure to understand who does what. Although these professions share similarities, your business will thrive better knowing the difference between the two.

Bookkeeping

In the past Bookkeeping was done by hand and it was considered a very tedious but important task. Considering the manual aspect, one can assume that there was a level of human error. Bookkeeping has started to slowly shift as technology continues to grow. The function of Bookkeeping includes:

  • Managing the books (ex: general ledger and bank accounts)

  • Recording transactions

  • Tracking income and expenses

  • Preparing and posting journal entries

  • Manage Accounts Payable & Receivable

  • Managing payroll

Today these tasks can be completed using software such as QuickBooks, Xero, Freshbooks, etc. As these functions are essential to running a business, you will need to have a system in place to ensure information is being updated or uploaded into the bookkeeping system as necessary. While electronic systems are not error-proof, they tend to be more efficient.

Bookkeepers aren't required to have a financial background, although experience in the field is a plus. They can however, become certified through the American Institute of Professional Bookkeepers. When people think of Bookkeepers, they think of data entry clerks but through experience, a Bookkeeper can grow to be an essential part of your business and the go-to person for the financial day to day tasks. As a business owner, it's not enough to have your financial information organized and entered into the system correctly. You need to understand what this financial information means for your businesses' overall financial health. This is where an Accountant comes in handy...

Accounting

The accounting function is a little more high level. Accountants are mostly known for their ability to analyze financial statements and supporting documents; this requires education and experience.

The type of educational background and designation that an individual has will determine their professional duties (Investopedia).

There's an ongoing debate as to whether a person is actually an accountant if they are not a CPA (Certified Public Accountant). Believe it or not, the answer to this depends on the state. I'm from New York, so that's the state I'm going to go with. To put it plainly, CPAs are accountants, but not all accountants are CPAs. Typically accountants must have a Bachelor's degree. They too can go on to become certified but certification is not required. However, ONLY a CPA can prepare audited and reviewed financial statements. If you are going to hire a professional accountant to assist you with your business finances, your expectations will determine the type of accountant you should hire.

A major difference between the two functions, is that Bookkeeping is mainly transactional and Accounting requires professional judgment. Some functions include:

  • Preparing and analyzing Financial Statements

  • Tax planning

  • Tax preparation

  • Completing income tax returns

  • Assist the owner in understanding profitability and cost management

What Does This Mean For Your Business?
As an entrepreneur, you need a cohesive process that successfully merges bookkeeping and accounting.

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A successful marriage between bookkeeping and accounting will contribute to the long-term financial success of the business (Bench Accounting).

Some entrepreneurs choose to manage their business finances on their own and only bring in a professional periodically. If you're unsure of what's best for you, check out these few questions on knowing when it's best to enlist a professional.

Do you manage and analyze your own books? Are there any hurdles you're encountering?