When it comes to managing money, knowledge is power. But if you’re not managing your finances, you won’t know what you don’t know.
Thankfully, managing business finances is fairly straightforward. At its core, financial management is simply keeping track of what you’ve made and what you’ve spent. You’ll need to ensure proper bookkeeping and recordkeeping, manage cash flow, and make and analyze financial statements.
In order to stay on top of finances, it’s best to record and categorize every transaction using accounting software or a spreadsheet. You can then generate and study your income statement every month to understand where your money is coming from and going to. If you do this, you’ve won 90% of the financial battle.
Here’s an overview of what you should be doing to stay on top of your business finances:
These daily, weekly, monthly, and quarterly tasks are all part of bookkeeping. If you’re not doing any of this today, that’s okay. Consider it a goal to work up to. At a minimum, you should start by entering every financial transaction into a bookkeeping solution about once a week, and reviewing your spending and cash flow (probably in the form of an income statement which your accounting software will generate for you) at least once a month.
Make sure you have accurate bookkeeping
Bookkeeping is the process of tracking all of your company’s financial transactions, usually by entering them into accounting software or a spreadsheet. In the old days, people entered these transactions into physical books, hence the term “bookkeeping.”
Bookkeeping shows you exactly how your business is spending money, where your revenue is coming from, and which tax deductions you’ll be able to claim. This allows you to make savvy decisions about cutting costs and planning for the future.
You can do your own bookkeeping or hire a virtual bookkeeper to complete your business bookkeeping on your behalf. Wondering how?
Keep a record
Recordkeeping is the process of saving important financial information for your business, which is required by the IRS. A general guideline is to keep tax records and receipts for three years. In some cases, you may want to hang on to them for longer.
When working remotely, you’re going to have fewer paper receipts. However, any transactions can still be recorded and saved. Apps like Expensify allow employees to capture and share receipts, while FileThis provides a digital filing system.
For more in-depth information on recordkeeping, visit How Long to Keep Business Tax Records and Receipts.
Review your financial statements
Knowing how to review your business’s financial statements will help you find ways to cut costs, make more profit, expand your business, or catch problems before they spiral. There are three main types of financial statements that are useful to your business:
- The balance sheet – Your balance sheet shows how much you have on hand (assets) and how much money you owe (liabilities).
- The income statement – Your income statement tells you how much money your business has spent and earned over a certain period of time. The income statement shows your net profit.
- The cash flow statement – A cash flow statement is a regular financial statement telling you how much cash you have on hand for a specific period. Not every business has a cash flow statement, but if you use the accrual method of accounting, this statement is important. With the accrual method, expenses and income are recorded when they are incurred, as opposed to when cash actually changes hands.
For more in-depth information on how to review and analyze your financial statements, visit How to Read (and Analyze) Financial Statements.
Manage your cash flow
Whether you’re working remotely or struggling on account of a recession, your business needs positive cash flow. Positive cash flow is when you have more money coming into your business than leaving it.
If you use the cash accounting method, your books will closely match your cash flow. However, if you use the accrual method of accounting, measuring your cash flow is even more important. That’s because you’re counting those dollars when you send an invoice as opposed to when you actually get paid.
For more in-depth information on cash flow and how to manage it, visit What is Cash Flow and How Can You Effectively Manage It?
Get organized for taxes and take note of potential deductions
Managing your finances is essential to ensuring your business is healthy, but it’s also necessary for taxes. Each year, you file taxes based on revenue, profit, expenses, and so forth. Having a good process for managing finances throughout the year will make tax filing much easier.
Being self-employed opens you up to a few worthwhile deductions, as does working remotely. For example, you may be eligible for the home office deduction, even if you weren’t in the past.
Taking advantage of these deductions is good financial practice in times of uncertainty. Your employees may qualify for deductions as well if they’re working from home. Here are a few deductions that are particularly applicable when working remotely:
- Utilities (including communication platforms like RingCentral)
- Business Insurance
- Home office expenses
- Legal and professional services (including bookkeeping services like Bench)
- Office expenses
- Rent or lease payments
- Repairs and maintenance
We recommend keeping track of all of these expenses and their documentation. At tax time, ask your accountant if you’re eligible for getting these deducted from your taxes.