Finance for Small Businesses
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As the nation transitions from fun in the sun to homework in homeroom, now is the ideal time for entrepreneurs to hit the books. The good news is there’s no need to spend a fortune on classes or textbooks considering all you can glean from your business’s financial books.
Unfortunately, many small business owners allow the third quarter to pass without ever glancing at their financials. Because most entrepreneurs prefer spending their time in the field rather than in the financials, they're missing valuable learning experiences that can improve business. Neglecting the books and administrative tasks can hinder growth and, too often, serve as the catalyst for business closure.
Make the most out of Q3 by following this quarter-end guide. Sprucing up on your bookkeeping basics can help ensure solid fourth quarter results and compliance for years to come.
Before digging into your Q3 numbers, do you have all the necessary data entered into your bookkeeping system? The sad truth is many small business owners don't stay current with their recordkeeping. And poor recordkeeping leads to limited insights into your Q3 financials.
Ensure you’re able to produce:
Whether you maintain a part-time bookkeeper or handle the day-to-day entry of transactions yourself, review the books on a quarterly basis. Once you’ve retroactively filled in the recordkeeping gaps to the best of your ability and established controls to keep accurate records from this point forward, you can dive into your numbers at the close of Q3. Analyzing Q3 numbers will not only show if your business is on track to finish the year according to expectations, it will also help you anticipate your tax burden if you haven’t made any quarterly estimated payments.
You may want to brush up on bookkeeping basics before you begin your Q3 bookwork. But if you know your way around your financials, follow these steps:
For the vast majority of small business owners, closing the books and preparing financial statements can wait until the end of Q4. But acting upon your financial information to date could mean the difference between hitting your numbers and a dismal Q4.
Brian Kim, a Chicago-based CPA specializing in the SMB market, identified Q3 as one of the most revealing quarters for your financial health. You can not only see if you’re on track to meet projections but also determine if you're maintaining enough or too much cash on hand.
Once you compare your revenue and sales projections against the numbers, you’ll be able to determine if you’re on track to hit your quotas or if now is the time to invest more heavily in sales and marketing before year-end.
While many entrepreneurs are competent in devising sales strategies and executing the tactics to achieve them, they often forget to keep an eye on their cash reserves. When an emergency strikes, cash on hand—not a strong sales pipeline—will come to the rescue.
To illustrate the importance of adequate cash reserves, Kim suggests an exercise to his clients: Pretend you have no income coming in for a month. Could your business survive? “The answer shocks a lot of people,” Kim said. “And a lot of times, the answer is pretty scary.”
The amount of cash surplus on hand will vary by business and industry. Generally speaking, you’ll want three to six months of cash on hand at all times. Any less, you likely won’t survive the unexpected. Any more, you’re probably not making smart investment decisions.
Overcoming a cash shortage. If business is strong but you don’t have much in the bank, poor planning is often the culprit. Unfortunately, starting to plan better now won’t mean more cash in the bank tomorrow. Achieving a healthy cash reserve will likely necessitate enacting some austerity measures, including limiting your advertising expenditures, reducing employee hours and delaying investments.
Before enacting any of the above methods, check your accounts receivable. You may find that certain accounts are months past due. If so, you’re actually in luck. You can overcome your cash shortage by taking a more aggressive stance with delinquent accounts and enforcing stricter collection policies. Of course, that might not make up for all the cash you need to raise—and not every small business owner has outstanding accounts receivable to save the day.
To help avoid a cash crunch in the future, examine your operating budget to ensure you’re including the expenses many small businesses neglect. For example:
Capitalizing on a cash surplus. How much cash on hand constitutes a surplus? Like many things in life, it depends. But in most situations and industries, any cash exceeding more than six months’ worth of budgeted expenses is a surplus.
In the event of a cash surplus, many entrepreneurs invest in everything from capital assets to more employees to new equipment. And as the end of the year draws near, the more expenses you can rack up, the more you can deduct.
Discussing your cash flow position and investment ideas with your accountant is your best bet. Each choice you’re weighing will likely carry tax burdens or incentives you’re unaware of. However, considering the current economy and the multitude of tax changes on the horizon, you accountant may tell you the best investment you can make is preparing for the unknown.
Whether your Q3 number-crunching reveals a healthy cash surplus or dire financial straits, many small businesses can improve their business operations and finances by taking a few preventative measures, such as:
While nothing can guarantee a strong Q4, capitalizing on the learning opportunities from Q3 is one of the best steps you can take for a promising year-end.