Financial Management
Like most things in life, there is a cycle to running a business. To succeed you will need to adopt one that fits your style, business, and personal cycle.
How To Start
First, you’ll need to do weekly reviews of your income and expenses and watch your inventory levels. These tasks can be completed by recording your income and expenses every day. To accomplish this, use a simple spreadsheet. Either an excel document on your computer, or a spreadsheet on paper. You can still acquire a pad of columnar pages through Staples or Amazon. Don’t take on an accounting program at $50 a month unless you are generating the income to cover it. It still takes the same amount of time to record it whether on paper or computer. It’s more important that it is done regularly than it is how you accomplish it.
Cash Flow
Your daily sales and expenses are totaled at the end of each week and recorded on a monthly record. Subtract your expenses from your sales/income and that represents your gross profit and will show you your cash flow for that week.
Don’t spend any of it until you record your operating expenses. These include your rent, utilities, phone, subscriptions, insurance, online/website expenses, and credit card purchases. This cash flow statement will keep you from overspending. Get in the habit of recording your daily sales and expenses at the end of every day. If you have a retail operation, set aside your opening cash ($200.00 usually is adequate) put the rest in your safe or safe area to deposit at the end of the week.
Sales Tax
If you are collecting state sales tax, record the amount you owe to your state. You’ll have to send those to your state tax commission. Every state is different. They should provide you with your tax rate and payment cycles when you register for your Sales Tax ID#.
If you have a lifestyle business, be sure to keep your business and personal funds separate. Have and use separate checking accounts and credit cards.
Don’t overthink this.
Accounting is very simple. Many make it sound complicated, but it is based on accurate, honest, and timely recording of your business transactions. Having your daily/weekly income and expenses will give you your “Balance Sheet”. We’ll create one next week. But first we need to talk about Start Up Costs and your business Structure.
Business Structure
Let’s look at your business structure. You’ll need to choose your business model before you get closer to launching your business.
If you’ve decided on a lifestyle business, a sole proprietorship is all you need. You use your Social Security Number as your business ID. You can pay yourself a salary and pay your social security self-employment tax with that. If you don’t want that number as your business ID, you can get an EIN (Employer Identification Number) from the IRS online and use that, but don’t use both.
If you have created your business as a legacy establishment, you will want to have an attorney create an LLC for you. Be sure you have consulted with a CPA first. They are schooled in business financials and are better situated to give you advice based on current tax laws. Treat your attorney, your CPA and your commercial bank representative as partners. They may cost you to benefit from their knowledge and services, but ours have saved us many hundreds of dollars over the years.
Start Up Costs
Projecting costs will include thinking about your startup costs, costs of goods sold and operating expenses.
Answering these questions will help you think about where, when and how you’ll start and the associated expenses with those decisions.
- Where will my business be located?
- What size will my business be initially?
- What will the facilities look like? What improvements are necessary?
- What furniture and fixtures will I need?
- What equipment will I need for the office or production?
- What types of signage will be required for the facility?
- What type of inventory and how much will I need before opening the business?
- What kinds of security deposits will be required?
- What types of governmental (local, state, federal) requirements must I comply with?
- Lease instead of purchase equipment
- Sub-contract instead of hire
- Start in your home.
- Delay hiring dates.
- Reduce inventory costs through drop ships and changing delivery dates.
- Reduce your salary with the expectation of increasing it later.
- Consider getting a part-time job to increase personal revenue.
Costs of Goods Sold (COGS)
COGS measures the “direct cost” incurred in the production of any goods or services. It includes material costs, direct labor costs, and direct factory overheads, and is directly proportional to revenue.
Sales – Cost of Product/Service = Gross Profit – Operating Expenses = Net Income
Gross Profit is a critical number to understand because it reflects the amount of money you have left to cover your operating expenses with respect to your total Net Income.
Inventory and COGS
Businesses that manufacture or assemble products, as well as those that resell products, must account for the inventory they have on hand. The same is true for businesses, such as interior decorating services, that provide both services and inventory. Other businesses, such as commercial cleaning services, might provide a service and not hold inventory.
The way your business manages inventory has an impact on both profits and cash flow.
When purchased, inventory is an asset recorded on the Balance Sheet. At any given time, assuming a customer wants it, you can sell inventory to regain cash. You should carefully monitor your inventory by selling older inventory items, even if it means discounting sales prices.
Inventory is worth cash only if it can be sold. Once sold, the cost of the inventory item is transferred from the Balance Sheet (Inventory Account) to the Income Statement (Cost of Goods Sold Account). When inventory cannot be sold, it becomes worthless to the business, and you should write it off and discard it.
Those are the basics of your financial journey. Create a habit of recording everything daily. After a few months, you could switch to weekly, but be sure you don’t forget and find yourself in a financial mess because of it.
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