Checklist for Managing a Small Business’ Finances

Date: November 14, 2006

Small-business owners need to be informed about every aspect of financing, from bookkeeping to cash-flow projections to securing loans from bankers. While you may not need to be an expert on each of these aspects (and, really, you can't be unless you have an accounting degree), the more you understand about these vital components of small-business finance, the greater the chance for your company's success.

The following checklist spotlights the main financial aspects an owner needs to be at least somewhat knowledgeable about. To learn more about any of these, consult with your business adviser, accountant or attorney––or read about them in any of the excellent accounting/business finance books available online or through retail booksellers.

1. Cash-flow projections. This aspect of finance is art and science. Most small-business owners can gauge cash flow from experience of previous revenue and expenses, market conditions and projected expenses. But a company can have record years of revenue and still be caught cash shy if projections are not in the ballpark.

The two aspects of cash-flow projection are sales forecasting and expense estimation. In general, the formula is:

Cash flow = total revenue - total expenses

But revenue and expenses are moving targets, hardly every falling and rising in synch. This is why projecting cash flow is partly an art.

Without an accurate knowledge of upcoming cash flow, it's difficult to properly monitor payments for marketing, inventory, facility expansion, personnel changes, etc.

2. Bookkeeping and accounting. Although you can hire trained professionals to handle this for you, the more you know about keeping accurate financial records, the more you'll have a handle on your own business. It's often said that a company's books are like the foundation of a building: Without it, you just can't build very high. In fact, well over 25 percent of businesses that fail do so because of accounting difficulties.

3. Keep track of the ratio between marketing and income generated by marketing. It's an absolute requirement to know how much income is generated from every marketing dollar. Without this knowledge, marketing money will inevitably be wasted. Tracking ads, keeping logs on sales calls and their results and monitoring the revenue generated by specific channels of marketing enable a small-business owner to expand on what works in marketing and drop what doesn't. This decision should never be entirely subjective.

4. Develop loan proposals. Establishing relationships with lenders and securing loans is a process, not a one-time event. This requires developing well thought out and comprehensive loan proposals/financial statements. Work with your accountant when setting up important proposals to assure that you supply lenders with everything they need to know.

5. Familiarize yourself with all different types of credit. Sometime your company may benefit from regular term loans. Other times a line of credit (secured or unsecured) may be preferable. Become knowledgeable with all types of loans so you can make the decision, not your lender.

6. Know about savings and investments, both for your company and for you personally. It's important to maximize the profits you earn once they're in the bank. Putting significant sums into a checking account that earns little interest means that you may be missing an opportunity to let the bank work for you. Similarly, your private retirement assets need to be managed wisely. Familiarize yourself with all aspects of investment, from stocks and bonds to CDs and money markets.

7. Know when to invest profits and when to plow them back into your business. This is an often-overlooked but vital growth fundamental. Work with a skilled money manager or accountant when considering options.

8. Start-up funding. This includes all funding secured during a company's first 3 to 5 years. Usually this type of funding needs to be the most creative because start-up companies do not have a financial track record.

9. Payroll. It's vital that you understand everything about how you pay your employees. Don't just let your bookkeeper write checks. Consult experts to make sure everything involved with payroll is secure and streamlined. This includes check writing or automatic deposit (with security measures put in place through your bank), meeting all federal and local tax and insurance requirements, retirement fund financing, etc. Payroll for a growing company is often more complex than anticipated. Staying on top from the beginning can save you untold headaches.

10. Develop an overall financial plan so that every dollar that comes in flows seamlessly through all the proper channels. The trail of every incoming check or credit should be systematic. Work with your accountant to design a system that assures revenue ends up where you want it when you need it.

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