Small business finances can be very challenging for entrepreneurs. They have visions of solving problems, building disruptive products, changing the world and maybe even making some money in the process. But many entrepreneurs often have difficulty managing, measuring and increasing their ability to make money due to lack of confidence in handling their business finances. So what do entrepreneurs need to know about money?
“The longer you’re not taking action the more money you’re losing”. – Carrie Wilkerson
Money Measures Performance.
A business transaction, or interaction between a customer, vendor, or employee can be measured in terms of dollars and cents. Money isn’t the only representation of your business transactions, but it’s a critical one.
It is easy to measure success primarily on the development of your product: on its features, beautiful interface and all of it’s capabilities. But every product must also be measured by the cost it has taken to move the product through every stage of the development roadmap. The only way to do this is to ensure that a business has a bookkeeping system that captures transactions on both a timely and accurate basis.
“Money won’t create success, the freedom to make it will”. – Nelson Mandela
Everyone has different motivations for starting a business, and making money is typically one of the most common motivations. Having more money in the bank account, is very different from knowing how to take action to improve cash flow. One is an effect and another is a cause. Entrepreneurs strive to cause an action that results in their desired effect and the only way to take that action is to be able to understand what their accounting results are telling them. Reviewing reports like the income statement, that shows financial performance, the balance sheet, that shows financial position and health, are critical tools that entrepreneurs need to use to help motivate them to take action and improve their cash flow.
Other People’s Money.
Entrepreneurs typically think that all of the money in their business belongs to them. That may be mostly true, but it’s also a commonly flawed view. If the business has investors or uses bank financing, then they’ve got “other people’s money” within the business and whenever investors or banks are involved, accurate bookkeeping systems need to be in place to ensure that their money is being properly handled. Many 3rd parties who put cash in a business require reporting and even financial covenants to be reported back to them on a regular basis. This will require accounting and bookkeeping processes to be in place to satisfy those requirements or to even obtain an investor or banker’s interest in the first place. Outside of these parties, there’s one who will always be interested in how much money a business makes as they always believe some of it is theirs….Uncle Sam. As law-abiding citizens, entrepreneurs will always need to comply with IRS guidelines and the first way to do that is to ensure a proper bookkeeping function is in place to report on how money moves through their businesses. The quickest way to run into tax issues is to not make tax filings or to have inaccurate data that raises issues with the IRS. Anyone who’s gone through an IRS audit can tell you how painful that process can be.
Understanding how money is tracked, managed, and improved within a business is a challenging, yet critical component of being an entrepreneur. Start off by ensuring that business transactions are properly captured and recorded. Then begin using financial reporting to take action within the business and to keep compliant with 3rd parties. Understanding how to read and use financial reporting may take some time, but feel free to “Ask Acuity” if you need any help with your small business finances or to learn how to interpret your reporting. We’re happy to help!