Becoming an entrepreneur is a learning process. While your passion will keep your business alive, your knowledge about human resources, legalities, and accounting will help it to thrive.
You don’t need to be a CPA and certified lawyer with a background in HR and marketing to succeed in business—you just need an open mind and a desire to learn.
One of the first things you should learn about: bookkeeping and accounting. Knowing how to manage your books has the potential to save your business when it’s in trouble and create a pathway to growth. Here’s why you need good habits in financial management.
1. Identify Wasted Spend
If you want your business to be profitable, your income needs to exceed the amount you spend. While most business models develop healthy ROI levels that can take a hit when expenses go up, you still want to keep them low overall in order to maximize your profits.
Bookkeeping provides clarity. It sorts your expenses into categories so you can understand where your operating budget goes. This visibility means that you can analyze your costs and look for any unnecessary spending cutting into your profits.
To get an idea of what this “wasted spend” looks like, look for software subscriptions that you never use, extra fees that add up over time, or vendors that overcharge—all items driving up your costs. When you lower these expenses, you’ll have more opportunities for profit.
2. Stay On Top of Owed Funds
Your accountant should track accounts payable and accounts receivable, otherwise known as money you owe to others and money that others owe you. Without good accounting discipline, it can be difficult to collect on outstanding debts—or even remember to pay your own.
If you don’t stay on top of owed funds, it could put your business in hot water. Your vendor could charge extra fees for late invoices or send your bills to collections if they remain unpaid.
Similarly, when you don’t stay on top of invoices in accounts receivable, you’re missing out on the money that your clients owe you. You may not have the operating funds needed for additional investments or paying down your debt.
3. Forecast Expenses and Sales
No one knows what’s going to happen in the next month, 6 months, or year. As a business owner, your role involves mitigating risk: taking chances when they’re lucrative while knowing when to avoid overly risky ones. One way you can get an idea of the future is with forecasting.
Financial forecasting is an estimate of future financial expenses and revenue. Accountants look at past performance during a set period and current trends to understand the potential for sales and costs.
For example, a swimsuit shop likely forecasts a sales spike during March and May as spring-break visitors flock to the beach. With forecasting, they can estimate what the increase in demand will be and determine how much they should invest in marketing.
Forecasting won’t accurately predict the future of your business with 100% certainty, but it can give you an idea of what is to come and help you plan for it.
4. Take Advantage of Tax Deductions
Tax season is one of the most stressful times of the year for entrepreneurs. Submitting tax information is much more complicated, and potentially expensive, as a business owner than as an individual. However, there are opportunities to save through tax deductions: an expense you can deduct from your taxable income so you have a smaller tax bill.
The items you can deduct (and how much) change frequently, but they tend to include advertising costs, education, home-office expenses, and legal fees. Unfortunately, you don’t get these deductions if you don’t file them.
Your bookkeeping will help you to sort all of your expenses and track what is deductible. With good accounting, you can pull your deductions at the start of the year and easily file your taxes—often saving hundreds of dollars and several hours of stress.
5. Lobby for Loans and Lines of Credit
If you need to secure additional funds to help your business through a difficult time, you’ll need to prove to a lender that you are a low-risk investment. The first thing this lender will look at is your financials.
If your accounting is a mess with incorrect books and disorganized invoices and expenses, they might not be able to decide whether or not you qualify for a loan. You risk getting denied financial help—or paying a loan back with less favorable terms.
If you don’t have a financial background, accounting and bookkeeping might seem like a chore at best and intimidating at worst. However, the above practices can help you to succeed in growing a stable business.
They can help you to identify why you’re in financial trouble and guide you through it. Don’t turn your back on valuable information—consider investing in an app like Sunrise, which can help you to sort through invoices and manage bank statements. We’re here to help your business thrive.