I often open my workshops with the question: “How many of you started your business to keep the accounting records?” Funny thing; no one ever raises her or his hand. Can it be that people start a business to engage their passion and serve customers?
Last week at the Whole World Workshop for health and wellness practitioners, I got the usual response to that question. No hands, but several chuckles. At that point, everyone was relaxed and ready for my presentation about Finance Fundamentals.
My presentation focused on four essentials for a healthy business:
- Separate Business and Personal Finances
The risks of commingling funds are a negative impact on your personal credit and cash flow and an inability to get a clear, isolated view of business finances. It’s never too early to open a separate business bank account, one for each separate and distinct business. Also, apply for a business credit card to help with payments and cash flow.
- Keep Up-to-Date Accounting Records
Keeping up-to-date records means you always know your financial situation. Separate accounting records should be kept for each business to substantiate income and expenses. No particular record keeping method is required – accounting package or spreadsheets – to capture the date, amount, business purpose, and income/expense type.
- Develop Budget and Cash Flow
Use income from existing sales and vendor contracts, leases, and historical data to develop an annual budget. Identify operating expenses by category. Remember seasonal and one-time items. Include plans for investment and growth. Project cash flow needs for 12-to-18 months based on when payments are due to make sure bills are covered.
- Track Financial Performance
Prepare and review a monthly bank reconciliation, income statement (i.e., P & L) and balance sheet. Compare actuals with budgeted income and expenses to identify where your plans need adjusting. Assess cash flow inflows and outflows to make sure you keep enough funds on-hand to meet expense obligations.
Maintaining a healthy business means keeping it “alive” and ready to deliver its products or services. The four essentials described above are as good as “an apple a day” to keep your business in good financial health.