Last week, I was thrilled to discuss business finances with the 2019 Class of the Arlington Chamber of Commerce Young Entrepreneur Academy, also known as YEA! In the YEA! Program, entrepreneurs grades 8-12, develop their ideas into robust business plans and launch their business. YEA! Entrepreneurs also pitch their business plans to an investor panel and compete for funding.
YEA! Entrepreneurs, like all business owners, need to know about planning and managing their finances. We only had an hour, so we covered three basic areas that support every entrepreneur’s success, regardless of age:
Separate Business Accounts and Financial Records
Open a separate business account soon as possible to avoid commingling personal and business funds. Apply for a business credit card to support cash flow needs and to avoid putting business expenses on your personal credit card. Establish separate financial records from records used to maintain your personal income and expenses. Separating personal and business finances gives you an isolated view of your business so you can better track your progress. Separate records also help to establish that you are operating business, not a hobby.
Track and Monitor Financial Activity
Keep a record of all business income and expenses up-to-date. Updated records allow you a clear view of your financial situation at any point in time. Expenses should be tracked by category, such as rent and advertising, so you know where your funds are going. No particular system or format is required for your financial records. The IRS just requires that financial records are accurate, complete, and provide enough detail to identify the underlying source documents. Produce and review monthly financial reports.
Adjust as Needed
A budget is a plan for your income and expenses, to prioritize your activities and provide a baseline to monitor your progress toward achieving your goals. Assess the significant variances between your monthly financial reports and your budget. Focus on the income and expense variances that relate to the most critical areas for achieving your business goals. Didn’t meet your budget? Don’t see it as a failure; see it as an opportunity to assess your plan, adjust your activities and try again.
My time discussing business finances with the 2019 Class of the Arlington Chamber of Commerce YEA! was fun. The YEA! Entrepreneurs asked sophisticated questions and shared experiences in their own business that I learned from. I’m so glad that the future business world is in these YEA! Entrepreneurs’ capable hands!
Workshops are a great way to share information that organizations can use immediately. Last week, I got an opportunity to speak with a room of entrepreneurs about three essential elements for a financially healthy organization.
Financial Essentials for Entrepreneurs covered three elements that must be in place for every organization:
- Financial Accounts
A separate financial account should be maintained for each business or nonprofit. It’s never too early to open a separate bank account. Each separate and distinct business should also get its own credit card to assist with payments and cash flow. Comingling personal and organizational funds presents a risk of not getting a clear, isolated view of business finances.
- Accounting Records
Accounting records should be kept for each organization to substantiate income and expenses. Keep those records up-to-date. You never know when something unexpected will come up. How would you know if you can afford it? Capture the date, amount, business purpose, and income/expense type using a method to that you can keep up with – or hire a professional to do it for you.
- Tax Compliance
Organizations must be properly registered the with the state, county, and local level, as applicable. Many counties and local jurisdictions have business property tax requirements. Employees? Got to pay employment taxes. Sales tax could also apply. Then, of course, is tax on net income for federal and state (depending on where you live or operate).
Up-to-date, clear financial information helps organizations stay ready to make an investment or decision. Bottom line, addressing the three essential elements described above are as good as “an apple a day” to keep your organization in good financial health.
How do you decide if your organization is ready to expand? Can you afford that new equipment purchase or that additional employee? What about adding a new service or product line?
Answering these questions takes reliable financial information. If the necessary information isn’t there, how good will those answers be? You could gather your team and do some guessing. But should your financial decisions be based on a guess? Probably not, if you want to stay in business or sustain your nonprofit.
Three actions will start you on the path to get reliable financial information when you need it:
- Build a Budget – Identify income sources, such as executed contracts and purchase orders. Estimate potential income from prospects and referrals, or based on historical data — if you have it. Determine all fixed expenses, such as rent and payroll. Estimate other expenses, such as supplies and inventory. Include occasional payments, like insurance.
- Track Cash Flow – Your budget reflects what you expect to happen. Tracking actual income and expenses in a cash flow format provides an instant view of your organization’s financial position. A clear and immediate financial view allows for informed financial decision making.
- Automate Where Possible – Automation increases accuracy and reduces the time needed to get financial information. It doesn’t have to be expensive or complex. Making it work depends on keeping the information up-to-date. Set-up at the beginning takes time, but it’s a worthwhile investment.
Stop guessing! Investing time and effort to budget, track and automate your financial information really pays off in the long run. Having reliable financial information at your fingertips goes a long way toward making the necessary financial decisions to sustain and grow your organization.