4 Fundamentals Of Financial Management Small Business Should Master

Financial literacy is essential to achieving long term success in spite of running a small business. Aside from keeping your financial records for tax purposes, there is a good reason proper financial management should be observed. Ever wonder why business fail? If you do not want to be part of the statistics, familiarising yourself with the fundamental of financial management will help you to put your business in proper perspective.

Start with a business plan

Your business plan serves as your road map to achieving success. Without a business plan, you will never know the direction your business is taking. A business plan helps you to set goals and face challenges. It keeps your eyes on the prize. Whether you want to get access to profit and loss forecasts, know your financial targets and budgets, a business plan will be critical to the process.

Do you follow a strong bookkeeping practice?

Good record keeping is essential no matter how established your business is. Since money is the lifeblood of your business, being completely aware how much you are getting and spending will give you a clearer understanding of your financial health.

Although many business owners find tracking expenses a boring task, one cannot argue that knowing the amount of cash you have will help you take total control of your finances. A business may be profitable, but without keeping your finances in check, being financially broke will not come as a surprise. Submitting detailed and accurate records is important especially when it comes to tax. Even with the use of bookkeeping software, being keen on checking the details is a must.

How do you manage your cash flow?

You cannot achieve peace of mind unless you understand your cash flow. Savvy business owners understand that cash flow is essential to any future business plans. Whether you want to grow your business, explore additional business opportunities or simply keep your cash flow intact to regularly pay monthly expenses, a steady flow of cash is important.

Do you have professionals to help you with your bookkeeping tasks?

Having a better picture of your business performance will help you understand where your business stands. Bookkeepers and accountants are crucial to the success of your company. They offer tailored advice based on your financial position. Having someone who identifies your business needs will lead you in the right direction. While outsourcing financial management to bookkeeping professionals may be costly, the numerous benefits still outweigh the cost.

5 Tips For Organising Receipts For Tax Time

If you are a savvy business owner, you will surely know the importance of keeping receipts. As you spend hours organising receipts, you will realise that the effort and time you dedicate pay off because these receipts can save your tax return from being in peril. While receipts may just be a piece of paper, it is considered valuable and should be taken seriously because it serves as audit protection. If you do not comply with the strict substantiation requirements of the ATO, it can create a problem in the future especially if you do not have records to prove that the expenses you incurred are indeed business-related.  You may end up left out in the cold if you fail to follow rules.

1.    Keep your receipts

Without a doubt, keeping all receipts cannot be overstated. Receipts are going to play an important role when arguing with the ATO because receipts are going to be your credible evidence. When you argue with the ATO without showing credible evidence that the expenses you incur was business-related, arguing will cost you more money and time.

2.    Scan receipts and keep them for future audit

The ATO may request for documentation and audit you up to six years so it is worth keeping your receipts at least six years so you will no longer face issues during an ATO audit. If you scan your receipts, make sure you keep a back-up as hard drive crashing can be inevitable. Once the ATO makes an audit and you have no evidence to present, they will definitely not buy your excuses.

3.    Indicate on receipts about their business purpose

If you have entertainment or dining expenses, it is a good idea to make notes of their business purpose. It is hard to remember why you went to dinner at a restaurant two years ago but if you have already made notes of the purpose, there is no need to panic.

4.    Keep a daily journal for your business

Although it may be an additional task that can contribute to your busy schedule, keeping a daily business journal can be a huge help especially when you need track some expenses you incurred in the past. Never underestimate the daily journal because they can save you from paying tax penalties.

5.    Don’t rely on cancelled checks and credit card statements

Although these are important they can still be considered insufficient without receipts. Receipts are going to be ideal for bookkeeping purposes because these are the details that are considered essential by the ATO auditor.

Interpreting Profit And Loss Report

Business owners consider the profit and loss report important because it is one of the reports that can determine which direction the business is going. Numbers reflecting on these reports must be interpreted correctly and accurately as there should be no room for mistakes. The bookkeepers will be the one to make some recommendations based on the reports. When a business is losing or making money, a Profit and Loss Report will be a determining factor.

Unfortunately, not all business owners understand the importance of these reports until their business fails. Since interpreting numbers of the second nature of every bookkeeper, it is no longer surprising that they know how to read the profit and loss report.

However, not all business owners can interpret or read a profit and loss report. Some may assume that everything is going in the right direction, but when the report is interpreted, the business is losing money, which is not a good sign of progress. There are various areas of profit and loss report that need more than just a simple interpretation and seeing the numbers go up is not enough.

Net Profit or Net Loss

When the figure shown in the report is positive, it only means that the business is making a profit. A negative figure means that a business loses money. The net profit or net loss provides information of the total of income, less cost of goods sold or purchases less expenses.

Expenses

The expenses provide the figures for business expenses including the cost of goods sold. The expenses also show the categories based on your industry. It also includes the operating expenses such as power, telephone, rent and many more.

Income

The Income shows the total of invoices or sales, which you have invoiced over a certain period of time. The Income does not yet include the investment income because this only falls under a section referred to as ‘other income’. This category is found on the bottom of the report. The business’ income is also called ‘turnover’.

Gross Profit

The Gross Profit refers to the incomes less purchases and the Cost of Goods Sold. It is important that a business owner understands the markup percentages and this is what the gross profit provides. The markup percentages are expressed as a percentage of income.

Cost of Purchases or Goods Sold

The Cost of and Goods Sold are the total of all the expenses that the business has incurred. The expenses are the ones that have contributed to the income of your business. The purchases refer to the inventory items that the company has sold and purchased. The items for sale such as the freight charges are the Cost of Goods Sold.

It is not only the bookkeeper that should be mindful of the figures on the profit and loss report because business owners must also understand these reports. When business owners know how to interpret these reports, it is easy to determine when and how changes can be made if something is not working with regard to the financial aspect of a business.

Does Your Business Have Problems With Budgeting?

Spending is essential in every business, but the money you spend must be closely monitored so you can determine if you are overspending. Mindless spending habits can have an effect on your business especially if you do not keep track of minor expenses. You might think that small expenses do not have an effect on your business, but once they are not liquidated, you will begin to wonder why there are some unnecessary expenses.

Signs you need to re-assess your spending habits:

Your unresolved obligations just keep piling up

Have you ever found yourself depleting your funds? Have you tried checking a list of obligations that remain unresolved? If this is the case, you need to re-evaluate your spending habits as something is just not right. Is your business headed in the wrong direction? It might not be going where you expect it to be and if you do not pay close attention to the way you are handling your expenses, the people you are doing business with will also lose their trust in you. Before payment obligations pile up, make sure they are settled.

You cannot handle petty cash

Do you have unbalanced accounts at the end of each week? You may need to review them if you cannot clearly identify where the problem lies. Unable to reconcile your petty cash is a serious problem that needs to be tackled by your bookkeeper or accountant. Budgeting is important because it keeps your finances intact. If you have no idea where your petty cash is spent on, you will have trouble keeping track of the amount of money you have. Soon, you will discover that one of the contributing factors for the failure of your business is due to overspending or taking money out of your budget without liquidating them.

Failing to pay bills in a timely manner

While overlooking some payment schedules may sometimes happen, habitually forgetting your payment obligations is a different story. Delayed payments can spell trouble if you do not do something about it. Make sure you prioritize expenses by setting aside money for paying your bills. The money you set aside is exclusive for bills payment. Make tax payment your top priority and if you need to pay for your credit card bills, you should also keep a budget so money becomes available when you need it.

You spend more than you earn

You are less likely to succeed in budgeting if you are spending more than you earn. As a business owner, you are required to spend as part of the growth of business, but if your expenses seem to create a serious impact on your business as you do not know where your money is going, it is a clear sign of overspending.

Failing to keep an eye on your expenses can increase the likelihood of losing your business. Spending money on unnecessary items and delayed payments can seriously hurt your business if you do not do something to improve your budgeting. A bookkeeper can help you spend wisely so you can free yourself of financial worries.