Small business owners face many financial management challenges as they operate their businesses. It's the beginning of a New Year and most small business owners are making their New Year's Resolutions about their businesses. Here's what you should promise to do about your finance operations!
I promise to better manage my cash flow.
Cash flow is the life blood of any business. Even if you show a profit on your income or profit and loss statement, it doesn't matter if you don't have enough cash flow to pay your monthly bills. Your firm will fail if you focus only on profit at the expense of cash flow. Many individuals new to business have to learn this the hard way - by running short on cash. It takes cash to pay your suppliers, meet your payroll every week, and outfit your office. Prepare a cash budget at least monthly and a Statement of Cash Flows along with your other financial statements. It will make running your company so much easier and will help maximize your profit in the end. Cash management is crucial for all firm operations.
I promise to prepare a business budget at the beginning of every budgeting period, stick to it to the extent possible, and change it with thoughtfulness when need be.
The budget for your company is your plan of action. Determine what you want your planning period to be and determine what your budget should be for that period. Your first step should be to put together a budget worksheet with entries for both the income you expect to receive and the expenses you expect to incur during the budgetary period.
It is always a good idea to establish your budget worksheet upfront and, even if your firm does not receive income from every source or have every type of possible expense each planning period, have a line item for it just in case. Any deviations that you have to make from your worksheet should be reflected in your next budget planning period.
I promise to keep better tax records in the future.
If you use a computerized accounting program, this resolution should be pretty easy since the software will do the work for you. But remember the old computer adage! Garbage in, garbage out! Enter your accounting receipts on a daily basis. Your software is only as good as the information you give it.
The only way to keep the end of your tax year from being a nightmare is to keep good tax records. It doesn't matter who does your taxes - you, your bookkeeper, or an outside CPA or accountant. You are ultimately responsible for supplying the receipts and documentation as well as paying the bill. If you will keep your tax receipts organized during the tax year, then the end of the year will be easy.
Organized receipts serve other purposes. They make it less likely that you will be audited by the Internal Revenue Service which no one wants. They ensure that you find all the deductions to which you are entitled which lowers your tax liability. They are at your fingertips if you find a mistake on a past tax return and need to file an amended return. Don't forget that keeping track of the mileage that you drive for business purposes is part of this process.
I promise to keep better track of my inventory during 2010.
Inventory is the least liquid current asset that your company has. In order to get rid of it, you have to find a buyer, which isn't always easy. You want to hold the least amount of inventory that you can to satisfy the demands of your customers without stocking out. There are costs to holding too much inventory and those are costs you want to minimize. Many small businesses do not keep a close enough eye on the amount of inventory on their shelves and end up cutting into their profits because of it.
Generally, about 80% of your sales are generated by 20% of your inventory investment. The rest of your inventory may be dead or slow-moving inventory. Resolve, in 2010, to go through your inventory and make more of it productive and less obsolete. Use the inventory turnover ratio to help you make that determination.
- I promise to analyze my financial statements each accounting period and try to forecast the future for my company.
The only way you know how your company is doing is to analyze the financial statements you develop at the end of each accounting period. You need to use financial analysis to look at trends in your company and to compare your company with other companies in the same industry. This is called comparative financial analysis. You can then make adjustments to get your firm back on the right track if you find any problems.
Based on your sales forecast, historical financial data, and economic data, you can then forecast what you think your firm's position will be out into the future. Of course, events will happen to change that forecast, but it will at least give you a general roadmap for planning.
Stick to these five New Year's resolutions and your firm will prosper in 2010!