20 Principles of excellent financial management – For business owners – Part 1
As a small business owner, there can be a lot to remember when it comes to finances. For some, this is second nature. For others, learning good financial management practises is a totally new ball-game.
Whether you are being supported by an accountant or not, it is very important to have at least a basic understanding of managing your money. Split into two parts, here are our first top ten tips for keeping your finances in tip-top condition.
1. Keep your business and personal transactions separate
Known by accountants as ‘economic entity assumption’, this process makes your accounting far simpler. By having separate bank accounts for yourself and your business, it’s easier to calculate expenses, earnings and just about everything else, without spending hours trawling through your bank statements. Treat your business as a separate ‘entity’, not an extension of your personal finances.
2. Date everything & run reports with similar timeframes
Every piece of financial collateral should be dated. Whether it’s statements, invoices, reports or receipts – put the full date on everything. If money was to ever go awry, or your accounts weren’t tallying up, a full timeline of your income and outgoings will help to alleviate concerns quickly.
3. Don’t confuse cost and value
Known to accountants as ‘cost principle’, this term refers to how items are recorded in financial reporting. Say your business bought a building and the value of the property sky-rocketed, your financial reports would only take into account the price you paid for the property. Value is reflected in the gain or loss when selling an asset.
4. Full disclosure with your accountant
Otherwise known as the ‘full disclosure principle’, this refers to the relationship between yourself and your accountant. You should disclose all financial information to ensure that your reporting and account management is always correct, up to date and meticulously accurate.
5. Always prepare for tax
No one wants to think about tax before it’s due, but it’s a great habit to get into. To protect your cashflow, many accountants will recommend that you syphon off a percentage of your revenue into a separate account. When your tax bill comes around, the money will be ready and waiting – preventing any surprise costs.
6. Pay yourself weekly/monthly
When you first start in business, this may not be feasible. Later down the line, the amount you pay yourself may still fluctuate. However, if you pay yourself on the same day of the week or month, it’s much easier to track your earnings and calculate your living costs. The amount may vary, dependant on turnover, but the date can remain the same.
7. Have a billing strategy and payment terms
In your billing strategy, you should invoice on a particular day of the week, offer inflexible payment terms (14 days, 30 days etc.) and impose financial sanctions for late payments. For example, you could explain that you charge a 10% surcharge on all invoices over a week late. It might seem harsh, but poor cashflow management is the number one reason that small businesses fail.
8. Check in on your books
In order to operate good financial management practises, you need to know what’s going on in your bank account. Using an online accounting system (such as Xero or Quickbooks) allows you to touch base your finances, whenever you want! Make it a habit to get friendly with your accounting once or twice a week.
9. Understanding your cash flow
In any business, there will be peaks and troughs throughout the year. If you are paying attention to your finances and keeping track of your income, you’ll know exactly when your peaks and troughs are. If you are quieter over the winter, you could start putting money aside in the busy summer months. Understanding your cashflow, when it’s flowing and where it’s flowing from, is incredibly important.
10. Understand your reporting
Speak to your accountant about the difference between your balance sheet, income statement, cash flow statement and revenue forecast. Once you’ve got a grip on how all these reports work together, you’ll find it easier to get the information you’re looking for.