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Cash Flow Forecasting: See Into the Financial Future of Your Business
11 Feb 2024 Cash Flow Forecasting: See Into the Financial Future of Your Business Katerina Myers Introduction to Cash Flow Forecasting Cash flow forecasting is a process of creating an estimate of a business's future cash levels over specified periods. Maintaining a company's cash flow predictions is a vital part of financial management for companies of all sizes. A cash flow forecast estimates the timing and amounts of cash inflows and outflows over a set timeline, usually broken-down month-by-month. It includes all expected sources of cash receipts like sales revenue, collection of receivables, and financing. It also incorporates all foreseeable expenditures such as payroll, taxes, inventory purchases, capital spending, and loan payments. By forecasting cash flows, companies can ensure they will have sufficient cash on hand to pay their obligations. Cash flow forecast reports allow businesses to take proactive steps if they foresee issues on the horizon, such as obtaining credit lines, delaying major purchases, or adjusting financing plans. Overall, cash flow forecasting provides critical visibility that helps businesses effectively manage their cash position. It is an essential financial planning tool that allows companies to anticipate their liquidity needs and make strategic decisions accordingly. With a detailed forecast in hand, businesses can confidently pursue opportunities for growth. What is in a Cash Flow Forecast A cash flow forecast accounts for all the money flowing in and out of business over a set period. Revenue/Sales Forecasts The revenue or sales forecast estimates the amount of money expected to come from sales of products and services. Since revenue is the primary source of cash flow, this is one of the most essential parts of the forecast. The forecast can be broken down by product, service, customer segment, and sales channel. Historical sales data, current sales pipeline, seasonality, promotions, and economic conditions all impact the revenue forecast. Expense Forecasts The expense forecast tallies up all the cash a business expects to spend over the forecast period. Examples include recurring operating expenses like payroll, rent, utilities, and inventory purchases, as well as non-recurring or intermittent expenses such as loan payments, taxes, maintenance and repairs. Examining historical expenses and factoring in new plans/needs informs the expense forecast. Capital Expenditures Capital expenditures (CapEx) refer to investments in assets like equipment, hardware, and facilities that require significant upfront cash outlays but provide value over the long term. While not a regular operating expense, CapEx needs to be incorporated into the cash flow forecast as it represents a significant cash outflow. Debt Repayments For companies with debt like loans or lines of credit, required debt repayments represent an important recurring cash outflow. The cash outflows include principal payments and interest owed. Accounting for debt obligations ensures cash is available when payments come due. Taxes Taxes also result in material cash outflows, whether income taxes, payroll taxes, or sales taxes. The tax forecast should account for estimated tax liabilities based on profits and taxable transactions. Having accurate forecasts for all sources of cash inflows and outflows allows businesses to anticipate their future cash position and make proactive decisions. This core information forms the foundation of an effective cash flow forecast. How Far Ahead to Forecast When creating a cash flow forecast, businesses need to determine how far into the future they want to forecast. There are a few standard timeframes used: Monthly Cash Flow Forecasts Monthly cash flow forecasts project inflows and outflows on a month-by-month basis. These are useful for getting a detailed view of your cash flow needs in the short term. Monthly forecasts are often done for the next 3, 6, or 12 months. Having the monthly cash flow figures allows you to monitor your cash position closely. You can see potential cash shortfalls well in advance and act to fix the situation if needed. Monthly forecasts require more work to maintain but give your business greater visibility into its near-future cash needs. Quarterly Cash Flow Forecasts Quarterly cash flow forecasts show your projected cash flow for each financial quarter ahead (three-month periods). You can forecast quarterly for the next year or two-three years. Quarterly forecasts strike a balance between detailed monthly projections and big-picture annual forecasts. Looking at the three-month periods smoothes out some of the month-to-month variability while still allowing reasonably accurate forecasts. Annual Cash Flow Forecasts Annual cash flow forecasts project your inflows and outflows for the entire year ahead. Forecasting annually is helpful for budgeting and planning purposes. It gives you a big-picture view of your cash flow needs and surpluses for the next 12-month period. The downside of only doing an annual forecast is that it needs more precision and early visibility into potential cash shortfalls. Monthly fluctuations get lost in the annual figures. For most businesses, doing quarterly or monthly forecasts is recommended. However, a yearly forecast can supplement more frequent projections. Methods of Cash Flow Forecasting There are a few main methods companies use to create cash flow forecasts: Use of Historical Data One approach is to start with historical cash flow data as a baseline. The company can take its actual cash flow from prior periods and use that as a starting point for estimating future cash flows. Using the historical data approach involves analyzing sales, expenses, capital expenditures, debt payments, and other inflows/outflows from previous financial statements. Past cash flow patterns and seasonality can help inform the projections. The historical data provides a grounded estimate, which can then be adjusted based on expected changes in business conditions. Percentage of Sales Another method is to forecast cash inflows as a percentage of projected sales revenue. For example, suppose a company expects $1 million in revenue over the next year. In that case, they may estimate their cash inflows at 95% of sales, or $950,000. This technique assumes that the historical relationship between sales and cash collections will stay consistent. Companies can further break this down, predicting cash inflows from specific customers or sales channels as a percentage of those subtotals. Bottom Up Build For a more detailed approach, companies build cash flow forecasts from the bottom up. This approach involves making itemized estimates of all expected cash inflows and outflows. The projections start at the transaction level for invoices, payrolls, taxes, inventory purchases, equipment investments, and debt repayments, for example. The cash effects of each transaction are modeled week-by-week or month-by-month. Granularly projecting each cash flow driver provides a higher accuracy forecast compared to the top-down percentage of sales or historical data methods. However, bottom-up build requires comprehensive knowledge of all business operations. Using Cash Flow Forecasts Cash flow forecasts are an essential planning tool for businesses of all sizes. They allow companies to get a clear picture of their short and medium-term cash position so they can make informed financial decisions. Here are some of the key ways businesses use cash flow forecasts: Identify Future Cash Shortfalls One of the main benefits of forecasting cash flow is that it can highlight times in the future when expenses will exceed income. The shortfalls may occur due to seasonal fluctuations, large one-off expenditures like equipment purchases, or due to an unprofitable period for the business. By forecasting future cash flow deficits in advance, companies can plan accordingly. For example, they may decide to build up cash reserves or secure a business loan to cover the expected shortfall. Having a plan prevents unexpected cash crunches that could threaten the financial health of the business. Plan Timing of Large Expenditures Cash flow forecasts help companies schedule large outlays of money appropriately. Significant investments like acquiring a competitor, purchasing expensive equipment, or moving into a larger site can weaken companies if not adequately budgeted for. By mapping out when these significant cash outflows will occur well in advance, businesses can build up sufficient reserves or arrange financing. This prudent financial planning allows companies to fund growth and expansion without jeopardizing day-to-day operations. Manage Debt Levels Forecasting future cash flow also enables businesses to manage their debt wisely. Taking on too much debt can be dangerous, especially if upcoming expenses exceed income for an extended period. By projecting future cash flow deficits ahead of time, companies can limit borrowing to sensible levels. They can also plan the timing of loan repayments to avoid cash crunches. Proactive debt management ensures businesses only take on what they can reasonably afford to repay, keeping financing costs down and preventing possible insolvency. In summary, cash flow forecasts let companies foresee their upcoming cash position. This allows them to identify future shortfalls, plan major expenditures, and manage debt sensibly. Using cash flow forecasts is vital for making informed financial decisions and ensuring the business remains liquid. It provides an invaluable long-term view that promotes stability and growth. Automating Cash Flow Forecasts You do not need to create cash flow forecasts manually. There are various software tools available to automate and streamline the process. Some key benefits of using cash flow forecasting software include: The software connects to accounting systems and imports data: Rather than manually gathering all the figures needed for the forecast, the software can sync directly with your accounting system or other business platforms. This automated data import saves significant time. Real-time tracking of cash flow: We update the forecast dynamically in real-time, allowing you to monitor the forecast against actual results and quickly see when projections are off. Customizable forecasting models: The software allows you to set up a forecasting methodology that fits your business. You can customize the timing intervals, line items, formulas, and layout. Scenario planning: Many tools have the functionality to run different scenarios for "best case" and "worst case" projections, providing valuable insights for contingency planning. Collaboration: Modern systems allow multiple users to access and update forecasts, enabling collaboration across teams. Reporting and analytics: Software can generate reports and visualizations from the forecasts to quickly summarize and glean insights. Overall, using a purpose-built cash flow forecasting software automates much of the grunt work involved. It provides efficiencies, richer models, collaboration, and insights to enhance data-driven decision-making. Evaluating options to find the right solution for your organization can take cash flow forecasting to the next level. West to East Business Solutions uses state-of-the-art software to give you the most accurate view of your future projections. Updating and Revising Cash flow forecasts should be considered living documents that require regular review and updating. The value of a cash flow forecast diminishes if it is not regularly revised to reflect changing business conditions. Here are some best practices for keeping your cash flow forecast up-to-date that we use at our firm: Review the forecast regularly: Set a schedule, such as monthly or quarterly, to formally revisit your cash flow forecast. Review actual cash flows compared to the projections and analyze any variances. Update with actual cash flow amounts: As you progress through the forecast period, update the model to reflect real operating cash flows. This improves the accuracy of future period projections. Adjust assumptions: 1. Review the key assumptions underlying your projections. 2. Update assumptions to reflect changes in expected sales volumes, prices, expenses, timing of receivables/payables, capital expenditures, or any other inputs. 3. Revise forecasts accordingly. Keeping your cash flow projections current will ensure they remain valuable tools for managing your small business finances and cash flow. The forecast will retain relevance if regularly reviewed and updated to reflect your latest expectations and operating conditions. One of the most important aspects of cash flow forecasting is effectively communicating the forecasts to key stakeholders in your business. There are several options for presenting cash flow forecasts: Charts and Graphs Visualizing cash flow forecasts using charts or graphs can make the data easier to digest. Bar charts are commonly used to show forecasted cash inflows and outflows over time. Line graphs can illustrate projected cash balances over the forecast period. Use clear labeling, legends, and data highlighting to ensure your visuals are easy to understand. Summary Versions In addition to detailed forecasts, create summarized versions highlighting key numbers and trends and present key takeaways upfront before diving into specifics. Executives often appreciate condensed overviews they can see at a glance. Customizing for Stakeholders Think about what cash flow details matter most to each stakeholder and tailor forecast presentations accordingly. For example, managers may want departmental breakdowns, while accounting is concerned with overall cash position. Consider stakeholder needs and positions when formatting and emphasizing elements. Effective forecast presentation ensures your hard work creating projections also pays off in practical use, driving operations, strategy, and decision-making. Apply best practices to transform cash flow data into insightful, actionable information. Cash flow forecasting is an essential practice for businesses. Still, it does come with some potential pitfalls to be aware of: Overly optimistic forecasts: It's easy to get carried away and make overly optimistic assumptions about future cash flows. However, forecasts should be based on historical data and trends. Setting realistic targets for revenue growth and expenses is important. Not updating regularly: Cash flow forecasts quickly become outdated and irrelevant if they are not updated on a regular basis. As business conditions change, the forecasts need to be revised. Failing to do so reduces their usefulness for planning. Limited visibility: Most cash flow forecasts only cover a three-to-six-month horizon. Trying to predict much further out than that with accuracy is difficult. Businesses should be aware of large expenses and debt repayments coming due in the more distant future. Avoiding these common pitfalls will lead to more accurate and valuable cash flow forecasts. Building in regular reviews and updates and keeping assumptions conservative are good practices. With realistic forecasts, businesses can better manage their cash and avoid potential shortfalls. Conclusion Cash flow forecasting is a critical practice for any business. By planning out your expected cash inflows and outflows over a future period, you can identify potential cash shortfalls or surpluses ahead of time. This gives you the lead time to avoid cash flow problems. Some key points to remember about cash flow forecasting: Forecast far enough into the future to anticipate fluctuations - generally 3-12 months out or more. The further out the forecast, the more room for error. Use historical data and future projections to estimate your cash inflows from sales and cash outflows from expenses each month. Consider seasonal patterns and trends. Continually update your forecasts with actual cash flow and revise projections. Cash flow forecasting is an ongoing process, not a one-time task. Present easy-to-understand forecasts to stakeholders using graphs and charts. Cash flow forecasts are an important communication tool. Automate forecasting using accounting software, when possible, for efficiency. But always verify computer-generated forecasts. Avoid common pitfalls like overlooking upcoming large payments or relying on overly optimistic sales projections. Stay grounded in reality. Cash flow forecasting takes effort but pays major dividends for businesses in visibility and control over their financial future. With diligent forecasting and monitoring, you can proactively manage your business's cash flow.
Start the New Year Stress-Free: Your End-of-Year Accounting Checklist
10 Jan 2024 Start the New Year Stress-Free: Your End-of-Year Accounting Checklist Katerina Myers Closing the books at year-end is an essential accounting task every business must undertake. The purpose of closing the books is to prepare accurate financial statements that summarize the business's performance and financial position. Having reliable financial statements helps business owners to make informed decisions, manage cash flow, secure financing, and assess the overall health of the business. Closing the books involves: · Gathering year-end financial documents · Reconciling accounts · Recording final revenue and expense transactions · Running a trial balance · Adjusting entries · Updating the general ledger · Preparing the final financial statements · Close Revenue and expense accounts Preparation and organization are essential - waiting until the last minute can unnecessarily complicate matters. The accounting team should allow sufficient lead time to collect financial information, follow up on discrepancies, and record transactions properly. With the right systems and procedures in place, businesses can close their books efficiently and emerge with financial statements ready for review and analysis, and not to mention tax season! While closing the books may seem like a daunting year-end chore, approaching it systematically step-by-step makes it manageable. Please feel free to call us with any questions (602) 821-7516. Gather Financial Documents The first step in closing the books at year-end is gathering all of the financial documents for the period. It includes locating any bank statements, credit card statements, receipts, invoices, bills, and other documentation showing financial transactions that occurred during the year. Collect bank statements for all business accounts, including checking, savings, and investment or money market accounts. Check online banking portals and download the monthly statements. Gather any paper copies of bank statements as well, if applicable. For credit cards used for business expenses, collect the monthly statements. Depending on the number of cards used, set up files or binders for storing these statements. Having them organized will help with the next steps of reconciling accounts and recording expenses. Obtain all receipts and invoices for expenses paid in cash, by check, or by debit/credit card. These are needed to have accurate records of payments to deduct. Make copies or scans of receipts to have both a physical and digital record. Double-check that all expenses have corresponding documentation. Also, gather any bills, invoices, or documentation showing amounts owed by customers for services or products provided by the business. These will come into play when recording revenue for the period. Having all these financial documents collected and organized is crucial to ensure all transactions are accounted for properly when closing out the year. It lays the groundwork for the remaining steps in the year-end close process. Reconcile Accounts Reconciling accounts is a critical step in the year-end closing process. It involves reviewing all balance sheet accounts and ensuring the balances match the source documents. The key accounts to reconcile include: Bank Accounts For each bank account, pull the final bank statement for the year. Compare the balance on the statement to that in your accounting records. If any outstanding checks or deposits are in transit, adjust the book balance accordingly until it matches the bank statement. Investigate any discrepancies and determine if adjustments are needed. Common reconciling items include bank fees, automatic withdrawals, interest earned, or deposits recorded incorrectly. Credit Cards Obtain the credit card statements for all business cards. Match up charges and payments on the statement to the entries in your books. Make any necessary adjustments. Calculate the balance due and ensure it aligns with the credit card company's records. Take into account any payments or charges made since the statement closing date. Accounts Receivable Generate an aged accounts receivable report. Verify that open invoices match outstanding balances owed by each customer. Follow up on any past-due accounts, disputed charges, or discrepancies. Write off any uncollectible accounts. Accounts Payable Print an accounts payable aging report. Confirm the balances and due dates match vendor records. Investigate any differences and determine if adjustments are needed for things like finance charges, payments sent but not applied, etc. Add new payables for recently received invoices. By thoroughly reconciling each account, you can identify and resolve any discrepancies before closing out the year's books. It provides assurance that all transactions are properly recorded. Record Revenue All revenue earned from products or services delivered during the accounting period must be recorded. It includes cash sales, credit sales, membership fees, subscription fees, or any other income. · Review sales records and invoices to ensure all revenue is captured. For cash sales, refer to receipts or point-of-sale system reports. For credit sales, check both invoices and payments received. · For ongoing subscription services, prorate revenue for the portion of services delivered during the accounting period, even if cash is received in advance. Defer any unearned revenue to the next period. · Match shipping documents with invoices to verify products were delivered before closing the books. Only revenue for delivered goods should be recorded. · Tally all the above sources to calculate total revenue. Double-check your work to confirm no income is missing or counted twice. · Enter the final revenue amounts into the accounting system to update the revenue accounts. It may include separate accounts for different product lines, locations, business segments, etc. Recording all earned revenue is a critical step before closing the books. Review related documentation thoroughly and validate amounts to ensure revenue is complete and accurate. It prevents understating income and provides a clear picture of business performance. Record Expenses At the end of the accounting period, recording all expenses incurred during that time frame is important. This includes operating expenses like rent, payroll, supplies, utilities, etc., and any other expenditures related to operating the business. Make sure to gather all bills, invoices, receipts, and any other documentation showing expenses incurred. Review bank and credit card statements to ensure no expenses were missed. For any pending bills or expenses without documentation yet, make an accrual-based estimate of the amount owed. Go through each expense line by line and enter it into your accounting system. Record the date, vendor, amount, account, and other details—track expenses to the proper accounts, such as rent expense, utilities expense, wages expense, etc. Enter expense accruals or estimates for expenses incurred but not yet billed if needed. Double-check that all expenses for the period are recorded, as any missing expenses will make the financial statements inaccurate. The income statement should show all costs of doing business during that time frame. Recording period expenses accurately is a crucial step for closing the books. It provides an accurate picture of profitability for the period. It ensures all costs are matched to the revenue earned in that timeframe. Taking the time to record and classify all expenses carefully prepares the books for financial statement preparation. Run Trial Balance A trial balance is an important step in the accounting cycle that helps identify any discrepancies or errors before you finalize your books. Generating a trial balance means totaling all debit and credit account balances to ensure they equal each other. If they don't match, it signals an error somewhere that needs to be located and fixed. To generate a trial balance, first, total all the debit balances and credit balances in each account. These two totals should match exactly. If they don't, scan your ledger and look for accounts with a balance on the wrong side. For example, if your Cash account shows a credit balance, that needs to be corrected to show a debit balance. It's also important to check that you have equal debits and credits for each transaction recorded in your books. If a transaction is recorded with unequal debits and credits, it will throw off your trial balance. Review transactions to ensure accuracy. Generating a trial balance is critical because it validates that your books are mathematically correct before moving on to adjusting entries and financial statements. It acts as a checkpoint, catching mistakes before they compound and creating bigger issues. Taking the time to run a trial balance can prevent headaches and rework down the line. Make Adjusting Entries One of the most critical steps when closing the books is to make adjusting entries. Adjusting entries update the books prior to issuing financial statements, converting the company's accounting records to the accrual basis of accounting. This is important because some events may not get recorded in time on a cash basis. There are a few main types of adjusting entries: Accruals Accruals record revenues earned or expenses incurred in one period but cash paid/received in another period. A common accrual is recognizing revenue that has been earned but has yet to be billed to customers. For example, a cloud software company would make an adjusting entry to accrue revenue for services delivered in December but billed in January. Deferrals Deferrals delay the recognition of revenue or expense that has been paid/received in advance. For example, a company may receive an annual software license payment in December that covers services for the following calendar year. The December payment would be deferred, and revenue would be recognized throughout the next year as earned. Depreciation Depreciation records the decline in value of fixed assets like buildings, equipment, and furnishings. Companies estimate how long assets will last and depreciate a portion of their value each year as an expense. Adjusting entries are needed to record the accumulated depreciation at year-end. Making proper adjusting entries requires analyzing events yet to be recorded and determining the appropriate accruals, deferrals, and depreciation needed. These entries are crucial for converting books from a cash basis to accrual, matching revenues and expenses to the right period. Accurate financial statements depend on making all necessary adjusting journal entries. Update Ledger After preparing and adjusting the journal entries, the next step is to post those entries to update the general ledger accounts. This ensures the account balances are accurate and up-to-date before preparing the financial statements. Post each adjusting journal entry to the applicable general ledger accounts, updating the balances. For example, if there is an adjusting entry to accrue interest expense, post that to the Interest Expense account in the general ledger, increasing the balance. Review each general ledger account and verify that the balance reflects all transactions for the period, including adjusted balances from the adjusting entries. Accounts like Interest Receivable, Interest Revenue, Depreciation Expense, Unearned Revenue, and Prepaid Expenses should now have updated balances after posting adjusting entries. The general ledger is now updated and complete with all transactions for the period. The account balances can now be used to prepare the financial statements. Updating the general ledger is a crucial step, as the financial statements will only be as accurate as the account balances in the ledger. Take care to post all adjusting entries and double-check account balances carefully. An up-to-date general ledger matching the adjusting entries is vital for accurate financial reporting. Prepare Financial Statements At the end of the accounting period, it's essential to prepare the financial statements, including the income statement, balance sheet, and statement of cash flows. These statements provide a snapshot of the business's financial health and performance. The income statement sums up all revenues earned and expenses incurred over the accounting period. This shows whether the business operated at a profit or loss for the time period. The income statement should list all income sources, cost of goods sold, operating expenses, depreciation, interest, taxes, and net profit or loss. The balance sheet lists assets, liabilities, and equity as of the last day of the accounting period. This provides a view of what the company owns and owes at that point in time. The balance sheet equation should balance, with assets equaling liabilities plus equity. Finally, the statement of cash flows tracks inflows and outflows of cash over the period. It breaks down cash from operations, investing, and financing. The statement reconciles the beginning and ending cash balances. Preparing these key statements provides the essential information needed to assess the business's performance and financial standing at the end of the accounting period. Comparing statements over time can identify trends and highlight areas for improvement. Accurate financial statements are critical for both internal and external decision-making. Close Revenue Accounts At the end of the accounting period, typically the fiscal year, revenue and expense accounts need to be closed out, and their balances need to be zeroed out to start fresh for the new accounting period. This allows the business to track revenues and expenses accurately in the correct period. To close revenue accounts: · Total all the revenue accounts and debit the balance—this zeros out all the revenue account balances. · Credit the total revenue balance to an Equity account, typically Retained Earnings. Retained Earnings tracks the company's accumulated profits over time. Crediting total revenues to Retained Earnings updates the balance to include this year's revenues. To close expense accounts: · Total all the expense accounts and credit the balance. This zeros out all the expense account balances. · Debit the total expense balance to Retained Earnings. This reduces Retained Earnings by the total amount of expenses incurred during the period. With revenues credited to Retained Earnings and Expenses debited, the net income or loss for the period is reflected in the updated Retained Earnings balance. The revenue and expense accounts are now closed and zeroed out, ready for the new accounting period. This allows the business to accurately track revenues earned and expenses incurred in the proper period. Should you have any questions, the West to East Business Solutions LLC team is happy to assist you with any level of accounting and financial planning. Please call for a free consultation today at (602) 821-7516 or email us at info@westtoeastllc.com. Schedule an appointment with our CEO, Nadia Conn, or get expert advice from one of our controller or staff accounts who have the knowledge and experience to get your business off to a successful start.
Accounting Basics Every New Business Owner Needs to Know
23 Dec 2023 Accounting Basics Every New Business Owner Needs to Know Katerina Myers Basic bookkeeping is the practice of recording all financial transactions for a business. It includes tracking money coming in (income) and going out (expenses). Maintaining accurate books gives small business owners a clear picture of the financial health of their company. Bookkeeping provides the data needed to produce financial statements like the income statement, balance sheet, and cash flow statement. These reports allow business owners to analyze their company's performance, spot trends, and gain insights to make intelligent financial decisions. For small businesses, bookkeeping is a fundamental part of financial management. With proper bookkeeping, it's possible to know whether the company is profitable, what the revenue streams are, what expenses need to be controlled, how much cash is available, and what taxes are owed. In short, bookkeeping gives small business owners the visibility they need to manage their finances and strategically operate their company. Keep Track of Income Keeping track of all money coming into your small business is critical to bookkeeping and accounting. It includes recording your business's income from sales, services, interest, or other sources. Most small businesses' income comes from providing products or services to customers. It's important to have a system to track each sale and payment transaction. Use software or spreadsheets to log details like date, customer name, product/service, and dollar amount for every income transaction. Keep all sales receipts and invoices organized for your records. If your business earns interest income from a bank account or investments, record these earnings as they are paid out. Other less common sources of business income may include rent payments from tenants, proceeds from asset sales, or miscellaneous income like rebates. Input each income transaction when it occurs. Having a complete record of all money coming into your business is necessary for accurate bookkeeping. It allows you to determine your true revenue and net income over time. Failing to track income transactions can cause major headaches at tax time or if you ever need to audit or analyze your finances. Get into the habit of logging every dollar that comes into your business from the start. Keep Track of Expenses Keeping track of all business expenses is a crucial part of bookkeeping for small business owners. Records every dollar that goes out of the business, whether it's recurring expenses like rent and utilities or one-time purchases like office supplies or equipment. Some basic expenses small business owners need to track include: Inventory costs: If you manufacture or sell products, you need to log the amount you spend to purchase inventory and document the value of your current inventory. This allows you to calculate the Cost of Goods Sold. Payroll: Track everything you spend on payroll, such as employee wages, bonuses, benefits, payroll taxes, and retirement contributions. Payroll is often one of the largest expenses for small businesses. Rent and utilities: Log all monthly expenses like rent, electricity, gas, water, internet, phone service, and other bills. Supplies: Things like office and cleaning supplies used to run the business must be recorded. Keep track of one-time big supply purchases as well as ongoing smaller ones. Equipment/assets: Record and depreciate business equipment, furniture, and vehicles. Repairs and maintenance: Track costs related to upkeep, maintenance, and repairs of business equipment and property. Travel: Mileage, flights, hotels, transportation, meals, and other travel costs should be diligently recorded, especially when traveling for business. Marketing: All advertising, promotion, and marketing expenses, such as online ads, printed materials, signage, sponsorships, trade shows, and more, should be tracked. Professional services: Record payments made to freelancers, accountants, lawyers, consultants, designers, contractors, and any other professional services. Carefully tracking every expense is critical for getting an accurate picture of the business's financial health and for tax purposes. Keeping meticulous records makes completing tax returns much smoother. There are various methods small business owners can use to track expenses, from expense reports to bookkeeping software. The key is to record everything and have an organized system. Manage Accounts Receivable Accounts receivable refers to money that customers owe your business for goods or services purchased on credit. Effectively managing accounts receivable is crucial for ensuring a steady cash flow and avoiding late or missed payments. You'll need to track all outstanding invoices and payments due from customers. Send invoices promptly and clearly state payment terms like net 30 days. Follow up with customers as invoice due dates approach. Offer easy payment options like accepting credit cards. Use accounting software to create professional invoices, log transactions, and generate aging reports showing unpaid invoices. Send payment reminders when invoices become past due. Evaluate individual customers' payment history and creditworthiness when deciding whether to continue offering credit terms. Write-offs or collections may be needed for severely late or uncollectible accounts. However, staying on top of accounts receivable and communicating with customers can go a long way toward getting paid on time. Manage Accounts Payable Managing accounts payable is a vital part of bookkeeping for small business owners. Accounts payable refers to the money your business owes to vendors, suppliers, contractors, and anyone else who provides goods or services to your company. It's important to keep track of accounts payable so you know who you owe money to and can pay your bills on time. Late payments can damage supplier relationships and hurt your business' credit. To manage accounts payable: Keep a record of all purchases and expenses. Save invoices, contracts, and other documentation related to anything you purchase on credit. Enter bills into your accounting software as soon as you receive them. It helps you keep track of due dates. Pay bills by their due date to avoid late fees and interest charges. Paying on time also maintains positive relationships with vendors. Take advantage of early payment discounts when offered by suppliers. It saves money for your business. Set up payment reminders and alerts in your accounting software so you never miss a due date. Review accounts payable reports in your accounting software. It gives an overview of who you owe and when payments are due. Staying on top of accounts payable is crucial for maintaining cash flow and keeping vendors happy. Pay your bills on time every time to build lasting business relationships. Reconcile Bank Accounts Reconciling your bank accounts is a crucial part of basic bookkeeping. It involves regularly comparing your internal financial records to your bank statements. The goal is to ensure that transactions are recorded accurately in both places. When you receive your monthly statement from the bank, gather your most recent records and carefully review each transaction. Ensure every deposit, check, withdrawal, and fee on the statement matches what you show in your books. If you find any discrepancies, you must determine the cause and make adjustments. For small business owners using accounting software, reconciliation can often be automated by linking bank accounts. The software will match up transactions and flag any discrepancies for you to review. But it's still important to verify that everything looks right. Reconciling regularly, such as monthly, helps catch any errors early before they compound. It also helps deter potential fraud or misuse of company funds if multiple people have access to accounts. Plus, reconciliation gives you an updated look at your true available cash. Overall, reconciling bank accounts takes a bit of time each month, but it's vital for accurate financial reporting. It's easiest to reconcile when you enter transactions frequently so they match recent bank statements. Proper reconciliation in your basic bookkeeping helps ensure your financial records are always up-to-date. Produce Financial Statements Financial statements are reports that summarize a business's financial performance over a specific period of time. They are important for business owners to produce on a regular basis in order to understand the financial health and position of their company. The three main financial statements are the income statement, balance sheet, and cash flow statement. Income Statement The income statement shows the revenue earned and expenses incurred over a period of time, such as a month, quarter, or year. It allows you to see whether your business made a profit or loss during that time period. The income statement lists all sources of revenue first, followed by all expenses. The difference between total revenue and total expenses is the net profit or net loss. Monitoring income statements monthly and annually allows you to see trends and growth over time. Balance Sheet The balance sheet provides a snapshot of a business's financial position at a specific point in time. It lists all assets (things of value owned), liabilities (debts owed), and equity (value belonging to shareholders) as of a certain date. Assets must equal the sum of liabilities and equity. The balance sheet gives business owners insight into the company's resources, obligations, and owner equity. Tracking changes in assets, liabilities, and equity over time shows the strengthening or weakening of a company's financial foundation. Cash Flow Statement The cash flow statement outlines how much cash is coming into and going out of the business during a defined period. It breaks down cash from operations, investing, and financing. While profitability is important, cash flow determines the business's ability to pay expenses and purchase assets. Monitoring cash flow statements helps owners understand their liquidity, ability to grow, and financial flexibility. Pay Taxes As a small business owner, it's crucial to understand and fulfill your tax obligations in order to avoid penalties. You'll need to pay various federal, state, and local taxes. Federal Taxes The main federal taxes for small businesses are income tax and self-employment tax. You must accurately report your business's income and expenses on your personal tax return using Schedule C. Any profit left after business deductions will be subject to income tax. You'll also owe self-employment tax to pay Social Security and Medicare taxes since you are your own boss. State Taxes Most states levy some form of income tax on businesses. The tax rate and rules vary by state. For example, some states tax business profits passed through to personal tax returns, while others allow you to file and pay taxes for your business separately. Check your own state's requirements. Local Taxes Many cities and counties collect taxes from businesses based on income and gross receipts. Common examples are occupational taxes, franchise taxes, and business license fees. Research the local taxes in your area. Keeping solid financial records will help you accurately calculate taxes owed. Deducting all eligible business expenses will lower your taxable income. Form 1040-ES can be used to make estimated quarterly payments if needed. Failing to pay taxes on time leads to interest and penalties, so filing and paying all required taxes should be a priority. Consider hiring a tax professional if you need help. Choose Accounting Software When starting out, most small business owners handle their finances using a basic spreadsheet. But as your business grows, you'll likely want to upgrade to small business accounting software. Accounting software helps automate tasks, synchronize bank accounts, generate financial reports, and make tax time stress-free. The three popular options for small businesses are QuickBooks, Xero, and FreshBooks. Here are their descriptions according to their websites: QuickBooks is the most widely used small business accounting software. It offers a desktop version with robust features for inventory tracking, invoicing, bill pay, and reporting. QuickBooks Online has a more intuitive interface designed for the cloud. You can start with a simple start plan and scale as your business grows. QuickBooks is ideal for companies that want an all-in-one solution to handle accounting, payroll, payments, and more. Xero takes a cloud-first approach and focuses on real-time visibility into cash flow. It syncs seamlessly with popular small business tools. Xero offers tailored plans based on the number of bills and invoices per month. Xero is best for service-based businesses that need to send invoices, track expenses, and have multiple users. FreshBooks combines accounting features with better billing and invoicing. It offers monthly plans based on the number of clients. The intuitive dashboard provides visibility into accounting and outstanding client invoices and payments. FreshBooks is an excellent choice for freelancers and service providers who want to simplify their billing and accounting in one place. When choosing accounting software, consider your business needs, number of users, and budget. All three of the leading solutions offer free trials, so you can experience each one hands-on before committing. The right accounting software saves time, keeps everything organized in one place, and sets your business up for success as it grows. When to Start Bookkeeping New business owners should start their bookkeeping as early as possible when starting their business. We recommend beginning basic bookkeeping practices immediately at launch rather than waiting until the company grows. Tracking finances from day one establishes good habits and business discipline. Recording all transactions from the outset provides an accurate picture of the business's financial health over time. It helps identify trends, expenses, and cash flow at a granular level. Beginning early also prevents an intimidating backlog of accounting work from piling up. Bookkeeping is much easier when done consistently in real time. As each transaction occurs, it can quickly be logged or input into accounting software. Waiting months or years to organize finances leads to the headache of sorting through piles of receipts and bank statements. The old adage applies: "Anything worth doing is worth doing from the start." Bookkeeping is core to a business's success. It provides data to make intelligent financial decisions and understand the bottom line. Rather than putting it off, entrepreneurs should prioritize basic accounting practices from launch. Consistent bookkeeping and financial awareness offer peace of mind and a foundation for growth. Should you have any questions, the West to East Business Solutions LLC team is happy to assist you with any level of accounting and financial planning. Please call for a free consultation today at (602) 821-7516 or email us at info@westtoeastllc.com. Schedule an appointment with our CEO, Nadia Conn, who has the knowledge and experience to get your business off to a successful start.