Accounting and bookkeeping are essential tools for keeping business finances in order, but first, you need to address other issues as a business owner. The first step to your business’s financial health is to separate business finances from personal ones.
It is a common mistake for a business owner to mix business and personal finances. This is natural since, in most cases, the start-up capital, or at least some of it, was from the owner’s personal savings or salary from another source of income. This mix of business and personal finances should be addressed early, and the separation should be done as soon as possible.
It is impossible to determine the company’s actual profit and losses if you are supplementing the income of the business with personal finances outside of start-up capital. It’s not to say that you can’t use your personal finances to fund the business, but you should be treated as any other investor and should pay yourself back from profits.
Separating the finances is not the only step you should take. It would be best if you also made your business a limited liability company. This simple move will protect your personal finances if your business goes bankrupt, is audited, or has a lawsuit filed against it.
In addition to separating your business and personal finances, here are some other ways you can keep your business finances in order.
Get Organized
Use a professional accountant or bookkeeper or accounting and bookkeeping software to stay organized with your finances. This organization will help you observe the due dates of invoices for on-time payments. Lack of organization can lead to late fees, high-interest payments, or loss of business.
Know Your Fixed and Variable Expenses
Fixed expenses are those you must pay every month, such as water, electricity, telephone, payroll, and taxes. Variable expenses are those costs that aren’t consistent and vary in cost and change or cease to exist. The knowledge of both your fixed and variable expenses will keep your finances in order and make bookkeeping easy and accurate.
Billing Strategy
Many small businesses struggle with finances due to billing issues. Accounts receivable is often a place within a small business where improvement is needed. There are several ways you can address billing issues. You can require the customer to pay in full upfront. In some businesses, demanding payment in full may not be suitable for getting and retaining customers. If that is the case, you can still get more invoices paid by offering customers a 2% discount on the total bill if they pay in full within ten days and make payment in full due within thirty days. These incentives are often used by clients of companies who implement the practice.
Track Your Books Closely
If you are working with a bookkeeper, review and monitor your books daily or monthly. This monitoring will help you avoid negative surprises. Knowing your books will help you formulate strategies for increasing profit and lowering expenses, and it can also help identify fraud. Even if you hire a professional accountant or bookkeeper, you, as the business owner, should always be aware of what is happening with your business finances.
Make Good Financial Habits
Being aware of your business finances and having a hand, at least to some degree, in your company’s bookkeeping is a great habit to get into, but you can do more. Set aside time every week or month, depending on your business’s volume, to go over your books and to strategize as needed to keep your business finances in order.
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