Starting with fifty dollars or starting with five hundred thousand, a small business owner must, must, must have a handle on his finances if his business is going to survive. You don’t need a degree in accounting to apply common sense or to take good advice. You do need a little self-discipline, but that comes fairly easily if you understand the reasons behind keeping track of your finances. After all, you have no problem doing what you consider the important parts of your business.
Accounting, bookkeeping, financial management, call it what you will, is more than a necessary but boring task. Money is a resource that you are using to help create your future — your many futures: next week, next month, next year, ten years from now. To the degree that you do not have control over your money, you are not controlling those futures.
Most people would say, “Here is where I want my business to be in a year; how much money do I need?” That is not controlling your future. The future starts now, today. So the correct approach is, “Here is how much money I have. How do I use it to get where I want to be in a year?”
See? Two necessary conditions: knowing how much money you have, and knowing where you want to get to. These conditions lead to the following necessary, basic rules of business finances.
1) Keep business money separate from personal money. If you put personal money into the business, it becomes business money.
2) Keep track of every penny every day, both the ones coming into and those going out of the business. This may seem obsessive, like keeping track of every nail in your tool bin, but it is not, for several reasons. For one thing, it will save you a lot on taxes to have accurate records. But even more important, you will be able to accurately evaluate your progress toward the goals you have set, and adjust your current actions accordingly.
3) You do not necessarily have to have a full accounting program on your computer to keep track of your income and expenses, but at the very least, you do need a single, specific place where everything is written down. A notebook will do. Stationery stores carry well-organized books designed for that very purpose.
4) Set some money aside each week. No matter how tight things are, or how much you owe, keep a steadily growing fund, and never touch it. Some regular percentage of your income is ideal, but if all you can set aside is a dollar, do that. This fund is not a reserve, to be used for emergencies. This fund is never used, except maybe, someday, as a down payment on a building.
Step Four is where almost all small business owners fall down. They don’t have the complete idea of using the money they have to get where they want to be. So get this straight, right now. Part of where any small business owner wants to be is solvent, and you don’t become solvent by spending everything you make. Always set some aside.
5) Spend only what is absolutely needed, even if you have more cash than usual. It is very easy to splurge on new equipment or extra advertising or whatever, when the money is there. Don’t do it. Spend what you need to, and set the rest aside. This fund is a reserve, a temporary surplus, completely separate from your other don’t-touch fund.
6) Finally, plan your expenses at least a week ahead. By Sunday night, you should know how much you are going to spend and on what during the coming week. Then only spend that much. If it’s not on the list, put it off until you can put it into next week’s planned expenditures. Ideally, you will be spending the previous week’s income, so you know how much you have to start with when you make the plan on Sunday night.
If borrowing is necessary for some major equipment, fine, so long as the payments can be covered by the income like any other regular expense.
These six rules will keep any small business on the path to becoming a big one. No one can reasonably be expected to follow them all perfectly, all the time, but come as close as you can. You will find that by focusing on future income and future expenses, you will have much more control over that future, so you can make it better.
Oh yes, one last note on finances: never, ever, ever spend money you have set aside for taxes. You would do better to go out of business and start over than to fall behind on taxes. If you haven’t experienced it, you can’t imagine the weight of the iron chains around your legs that unpaid taxes can weld in place for years.