Many entrepreneurs who get stressed about their money don’t have a revenue problem. They have a process problem. The activities are taking place, the cash is flowing – but if there is no consistent process to support it, every quarter-end is stressful and every tax season is overwhelming.
Stop Reconciling Annually, Start Closing Weekly
The most harmful behavior in finances of every small business is waiting until year-end to reconcile your books. It’s bad enough that you’re driving blind eighty percent of the year. It’s worse that you’re driving a car that’s out of alignment. Steer a little off one way because you think you’re low on cash or bookings aren’t as strong as you hoped, and you overcorrect a couple of months later in the other direction because sales were better than you anticipated.
Weekly closing isn’t just about knowing your numbers today, although that certainly doesn’t hurt. It’s about keeping error in check. For each week you go without reconciling, you accumulate more ways your books don’t reflect reality. And there’s one week left in the year when you’ll notice that – there are 52. Fixing a week’s worth of errors usually impacts one row on a spreadsheet. Fixing 52 weeks worth usually impacts ten or twenty. Fixing 365 can break the thing in half.
Separate The Person From The Business
If you use your personal bank account or credit card for business purchases, or vice versa, it’s nearly impossible to keep clean books. Mixing expenses can result in missing out on deductions for business expenses at tax time. A business accountant can help you estimate how much you’re likely to overpay, which makes it easier to compare that to the cost of opening a separate account.
Using your personal account makes it especially easy to miss out on business deductions, as most people never think to deduct a portion of their rent or mortgage interest, utilities, homeowners or renters insurance, property taxes, or the cost of household maintenance like cleaning supplies or pest control. But those all qualify if you use a portion of your home regularly and exclusively for business. You could even write off lawn care and a percentage of landscaping. Have you ever missed out on those deductions because they’re a hassle to track down? You’re losing more money than it would cost to open an account or get a business card.
Move From Reactive Accounting To Forward Planning
Making decisions based on what’s left in your account is the first place to start breaking the cycle. Call it reactive accounting. Your business is already a step ahead of most startups – around 82% of small businesses that fail do so because of poor cash flow management or poor understanding of how cash flow impacts their business. Not a funding problem. A forecasting problem.
A three-month rolling cash flow projection fixes that. Certainly, that sounds complex and overwhelming, but it doesn’t actually have to be fancy. Just consistent. Projecting three months out means you see the seasonality in your business and how February’s a slow month which makes September the stretch. Reevaluate every month when you do your full reforecast and gain a sense a month in advance on whether you’re going to have a problem.
Audit Your Software Stack
Doing things manually is a disaster for accurate data. In scenarios like keying sales into your point-of-sale system and then typing them into your accounting system and then re-typing customer data and invoice amounts into whatever payment system they’re going to be paid on lie many opportunities to get the totals and the dates wrong.
Generation and manually entering invoices can also lose track of their due status. An invoice without due date information shouldn’t be an invoice. However you track that due date – whether you set it, or it’s relative to the invoice date, or part of whatever payment terms you’ve agreed to with the customer – if that information isn’t in the invoice, either your team or your customer can use it is an easy excuse for lateness.
Likewise, your odds of punching in the wrong amount offered or paid are directly proportional to the number of times you’ve had to both type and read that number.
Know When To Stop Doing It Yourself
There comes a time in every expanding business when the DIY method of managing business finances becomes more expensive than it is beneficial. Not directly – you can’t receive an invoice that highlights “missed deductions: $4,200.” However, the complexity limit exists. Tax planning, internal fraud protection controls, and keeping up with new reporting requirements become increasingly more complex demands.
The risks associated with going over that limit (late penalties, audit risks, and overlooked deductions) versus the cost of submitting everything to professional supervision tip the balance. Getting a business accountant at that point isn’t an expense – it’s an essential upgrade to the engine that will allow your business to go faster and further.
Build The System Before You Need It
Financial systems are not something you only really need once your back’s against the wall. They are something that helps ensure your back never hits that wall in the first place. Are founders who feel in control of their finances simply “good at math?” No, they’ve just established four simple routines that turn their financials into a superpower of predictability. 1. Start with the weekly close, 2. Separate your accounts, 3. Project three months forward, and 4. Connect your accounting software.
