Accounting for revenue and expenses can help keep your business running smoothly. Make sure you maintain proper bookkeeping and have a basic knowledge of business finances.
Start with a balance sheet
The balance sheet is the foundation of managing your finances. It operates as a snapshot of your business financials. It helps you keep track of your capital and provide a cash flow projection for future years.
A balance sheet will help you account for costs like employees and supplies. It will also help you track assets, liabilities, and equity. You can get insights by separating and analyzing segments of your business, like comparing online sales to face-to-face sales.
Most business owners don’t dive into entrepreneurship because they are excited about the accounting process, but a basic understanding of accounting sets a successful business apart from those that struggle. Fortunately, many places and people are willing to help you learn, including your accountant, your bookkeeper (if you employ one and don’t do the books yourself), as well as the resources at SCORE.
One of the most important financial documents every business owner needs to understand is the balance sheet.
Your balance sheet helps you understand the relationship between your income and your expenses, so you can maintain profitability. This document will help you become a profit expert in your business because it will allow you to work with your business’ financial numbers to build a workable balance. This incredibly powerful tool not only tells you where you’ve been, but it will help you forecast into the future.
How will the year’s operations affect assets, debts and owners’ equity? For example, if you are planning significant sales growth in the coming year, go through the balance sheet item by item and think about the probable effects of assets.
Technical Tips on Using the Template
1. Your firm’s balance sheet no doubt has more lines than this template. For clarity and ease of analysis, we recommend you combine categories to fit into this compressed format.
2. As always for projections, we recommend that you condense your numbers. Most people find it useful to express the values in thousands, rounding to the nearest hundred dollars; for example, $11,459 would be entered as 11.5.
3. In the Fixed Assets section, the “LESS accumulated depreciation” figure is the total of all depreciation accrued over the years on all fixed assets still owned by the company. Be sure to enter it as a negative number so the spreadsheet will subtract it from Total Fixed Assets.
4. In Owners’ Equity, “Retained Earnings-Beginning” is retained earnings as of the last historical balance sheet or the end of the last fiscal year. “Retained Earnings-Current” is net profit for the period of the projections, less any owner’s draw (for partnerships and proprietorships) or dividends paid (for corporations).
Cost-benefit analysis (CBA)
Looking closely at money-in and money-out helps maintain a sustainable balance between profit and loss. From development and operations to recurring and nonrecurring costs, it’s important to categorize expenses in your balance sheet. Then, you can use a cost-benefit analysis to weigh the strengths and weaknesses of a business decision, and put potential recurring benefits and cost reductions in context.
A CBA is a technique for making non-critical choices in a relatively quick and easy way. It simply involves adding money in benefits and money in costs over a specified time period, before subtracting costs from benefits to determine success in terms of dollars. This can come in handy with hiring another employee or an independent contractor.
For example, let’s say you’re deciding whether to add outdoor seating for your sausage themed restaurant, Haute Dog. You estimate outdoor seating would add $5,000 in extra profit from sales each year. But, the outdoor seating permit costs $1,000 each year, and you’d also have to spend $2,000 to buy outdoor tables and chairs. Your cost-benefit analysis shows that you should add outdoor seating, because the new benefits ($5,000 in new sales) outweigh the new costs ($3,000 in permitting and equipment expenses).
Pick a method of accounting
Businesses often use either the accrual or cash methods of recording purchases. The accrual method puts transactions on the books immediately upon completing the sale. The cash method only records this once payment has been received.
For example, if you make a sale in January and receive the $200 payment in February, an accrual method would allow you to record that on January’s books, while the cash method would require that payment to land on February’s books.
Creates immediate snapshot.
Can reduce tax burden.
More complex to manage.
Potentially deceiving figures.
Shows cash flow clearly.
Easier to understand.
Limits predictive value.
Less long-term clarity.
There are many strategies for preparing financial statements for a small business. Generally accepted accounting principles, known as GAAP or “Gap,” provides a common a way to standardize financial reporting using the accrual method. Private companies aren’t required to follow GAAP. The Financial Accounting Standards Board (FASB) maintains GAAP in the United States.
Get accounting help
You might want to get help with your accounting. Consider hiring a certified public accountant (CPA), bookkeeper, or using an online service.
A CPA will typically cost more than online services, but can normally offer more tailored service for your specific business needs. A bookkeeper can provide basic day-to-day functions at a lower cost, but won’t possess the formal accounting education of a CPA.
Ensure that someone can manage the following:
- Accounts receivable
- Accounts payable
- Available cash
- Bank reconciliation
Manage business credit
Establishing and managing business credit can help your company secure financing when you need it, and with better terms. Business credit can be crucial for negotiating supply agreements and protecting against business identity theft.
These five steps can lay the groundwork to sound financial planning.
- Determine whether you have business credit on file with Dun & Bradstreet
- Establish a business credit history by using lines of credit associated with your business
- Pay bills on time and understand other factors that influence your credit rating
- Keep your credit files current and monitor for ratings changes
- Know your customers’ and vendors’ credit standing
Knowing your customers’ credit standing gives you a window into consumer patterns, and that can affect your marketing and sales strategy. You may not need to conduct credit checks, but there are credit evaluation tools available for small business. Customer behavior also impacts your business’s cash flow, which affects planning for future supplies, hiring employees, and expanding your business.