One of the best ways you can ensure your business is financially healthy is understanding a few key accounting rules and terms. The following are the basics of financial management that small business owners should know about:
Don’t Mix Personal and Business Finances
It’s recommended that you separate your personal and business finances. Why is this so? First, separating your personal and business finances is vital for tax and organizational reasons. Keeping both finances separate will make it easier for you to manage your bookkeeping and requirements for business tax. Second, not mixing these finances has legal implications. If you ever face any legal challenges in your small business, your personal finances will be protected, and vice versa.
Understand Business Accounting
You should learn to understand the basics of business accounting. However, this might be intimidating, especially if you have no background in accounting. There are several basic accounting documents and terms that are easy to learn. Knowing these essentials will allow you to better manage how accounting impacts your business.
Basic Business Accounting Terms
As you continue to explore the world of small business money management, there are buzzwords that you’re likely to encounter over and over again. Following are basic accounting terms you should know:
Gross Revenue
Also called total revenue, gross revenue is the total sum of funds you receive from your customers in exchange for your services or products. Also, gross revenue is the amount before subtracting any expenses or deductions like rent, taxes, and cost of goods sold.
Expenses
Expenses make up the amount of money that stops your gross revenue from going into your pocket. This includes payroll, rent, taxes, utilities, interest on debt, and other essential operating expenses.
Net Profit
Net profit is sometimes called the net income, bottom line, or net earnings. It is what’s left over after you’ve subtracted your expenses from the total revenue. If the net profit is positive, it implies that your revenue is greater than your small business expenses. It also means that your small business is profitable.
Cash Flow
Having enough money on hand can make or break your small business. Even if you consider your business profitable, not having enough cash in your business bank account can be problematic.
Cash flow is considered the difference between the available money your business has at the beginning of the accounting period compared to the available cash at the end of the period. The cash comes in from loan proceeds, sales, sale of assets, and investments. It then goes out to pay for direct and operating expenses, purchase of assets, and principal debt service.
Keep Track Of Your Loans
You should have accurate records of the amount you borrow for your small business needs. When your business makes a profit, you can pay back all of your loans easily.
Make Sure You Have Enough Capital
If you’re new to the business world, this tip is for you. Several small businesses most likely don’t have enough capital to get through the startup phase. To address this, it’s best to have three months of living expenses saved up. This will cover the amount you’re expecting to use for the first three months of your small business expenses.
Pay Your Bills On Time
It’s vital to learn how to pay your bills on time. In fact, you should be consistent in doing so. Loan payment, credit card bills, and utility bills can add up fast. Set up monthly reminders so that you don’t forget any of your payment schedules.
Handle Your Credit Scores
It’s recommended that you maintain a good business credit score. Whether it’s an equipment or a property lease, a small business loan or a business credit card, at some point, your business will need to access credit to run smoothly. Your ability to qualify for small business financing will depend on your business credit status and credit history.
In Summary
Managing business finances can be challenging for most small business owners. However, if you want to have a successful small business, you should learn the basics of small business money management.
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