Let’s face it: one of the least fun things about running a business is recordkeeping. However this somewhat tedious chore is vital to your success. Here’s why you should routinely keep track of your income and expenses.
1. Track cash flow
One of the fastest ways to go out of business is to run out of money to pay your bills. To avoid this unfavorable result, you need to keep an eagle eye on your cash flow. This means checking regularly on your accounts receivable (money that is owed to you) and your upcoming financial obligations (money you’ll need to spend to pay your bills). The only way you can do this is to have the information about your income and expenses on hand—in your books.
Your current accounting software, such as Quickbooks, enables you to track cash flow. If your business essentially operates from hand to mouth, you may want to use special cash flow tools to track this particular metric. For example, there are apps, such as FreeAgent and Pulse that you can add to your smartphone or tablet for this purpose.
2. Monitor profitability
Sales may seem to be going fine, but this doesn’t necessarily translate into being profitable. You could be losing money despite having healthy sales. The only way to know for sure is to look at your numbers. Profits essentially are the amount you reap after paying expenses (including taxes on profits).
By monitoring profitability, you can know when it’s time to increase your prices, cut certain expenditures, or make other changes in your business operations.
3. Build business credit
If you want your business to build its own credit rating so that you, as the owner, will someday no longer be required to guarantee loans to your business, you need to take action. One of the best ways to passively build business credit is to pay your bills on time. Creditors that report to business credit bureaus, such as D&B, contribute to a good credit rating if you avoid late payments.
4. Make changes in your company
Business actions ultimately come down to your numbers. You may feel like you need a new employee to share the workload, but can your business afford it? You may want to buy the newest smartphones for your staff, but do you have the money to do it? Keeping track of your income and expenses enables you to make final decisions about proposed business actions.
5. Plan ahead
No one has a crystal ball to know the future, but you’ll be able to do strategic planning for your business if you have a good financial foundation. Again, your books tell the story you need to know in order to plan for expansion, relocation, or other significant event for your business.
If you’re planning to sell your business down the road, again, the first step is to make sure good records are in place. This will help you to optimize your sale price and help convince prospective buyers that your company is a good investment.
Whether you use software, an online solution, or merely a written ledger, be sure you create a system for accurately and easily recording and reviewing your business’ financial activities. If you need help with this, consult a CPA or other “numbers” person.
About the Author:
Barbara Weltman is an attorney, a prolific author with such titles as J.K. Lasser’s Small Business Taxes and J.K. Lasser’s Guide to Self-Employment, and a trusted professional advocate for small businesses and entrepreneurs. She is a guest columnist for The Wall Street Journal and U.S. News and World Reports and contributes regularly to SBA.gov and SmallBizTrends.com. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com and a radio host. Follow her on Twitter @BarbaraWeltman.