When starting a small business, working on your finances may not seem like the most exciting of tasks… but it’s crucial to ensure your side hustle becomes a sustainable, profitable business.
Here’s a few easy tips to help you manage the finances of your small business and keep things going on the up and up.
Firstly, why it’s important to manage your income and expenses
Managing your income and expenses tells you how much you’re spending versus how much you’re bringing in. For example, if you spend $1000/month on expenses such as promoting your business, but only have an $800 income/month from customers buying your product or using your services… you’re working on a loss, obviously not good for the long term viability of your business. Unless, that is, your strategy is to over invest in communication for a (short!) period of time.
The basics – using a spreadsheet to manage your finances
Having a spreadsheet to manage your finances doesn’t have to be overly complicated, it can be as simple as using Excel, Google Sheets or a similar style of program/service. Either way, here some pros and cons of using a spreadsheet:
Finances can be easily inputted and managed
You can clearly see where your money is
Makes it easier for doing taxes at the end of the financial year
They’re easy to set and use
You can quickly format and colour code your spreadsheets, depending on what you’re doing
You have to input your figures manually- which takes time
You need enough categories for every element of your budget, e.g. receipts, income, GST, etc.
Minimal protection from data corruption
More advanced finance management
While a spreadsheet may be a fairly simple way of managing your finances to see where everything is going, there are more advanced financial management applications to consider. Key players in the ‘software as a service’ accounting packages are:
Each site requires you to pay a sign up fee (after a free trial) and automatically sync with your bank account allowing you to quickly keep track of your businesses finances, generate financial reports and create invoices etc.
Understanding the difference between an accountant and a bookkeeper
A bookkeeper is responsible for the recording of financial transactions, whereas an accountant is responsible for interpreting, classifying, analyzing, reporting, and summarizing financial data.
Now, that’s not to say an accountant can’t do any bookkeeping for a business or a bookkeeper couldn’t become an accountant. In general, the cost of using a bookkeeper is a lot less per hour than an accountant, however typically you’ll only use accountants for short periods annually or every quarter, while your bookkeeper may be involved throughout the year, with constant access to your Xero account (or other).
Keep your records accurate from the start
When the end of financial year comes around, this will be incredibly important as, when you do your taxes, you will need to provide evidence to substantiate any business related expense. If you don’t keep on top of reconciling and categorising your financial statements, it’s easy for things to get away from you.
Don’t get slack on invoicing
For many people, asking for money is not a comfortable thing to do but, if you perform a service for a client, it’s important to invoice them appropriately for your time and effort by requesting they pay your fee.
Sending invoices is one thing, chasing up payment is another. Services such as Debtor Daddy or the payment reminder feature in Xero are useful tools for gently reminding your customers to settle their bills. Worst case, it’s sometimes necessary to consider the option of withholding services or goods if accounts are far overdue.
Keep a separate business bank account
Finally, keeping personal and business bank accounts separate is a great simple way to manage your businesses finances as you know what that money is for, how much you can spend on your business and how much it’s bringing in, and it keeps a very clear line between your personal finances and business finances.