Managing Cash Flow
CONGRATS! After lots of hard work and long hours, your business is generating revenue!
However, managing that cash flow right off the bat can be pretty tricky and a bit overwhelming. That’s why in today’s blog post, I’m going to let you in on some secrets for handling your income and your costs.
My first tip is to separate your business finances from your personal ones. Basically, you should create a separate business checking account along with any other accounts you feel are necessary. Make sure to protect yourself from tax audits in the process. Opening multiple accounts also introduces the opportunity for you to begin forming a good relationship with your banker!
Tracking your revenue and expenses is my next piece of advice. The moment you start to take your company’s finances seriously is the moment you transform your hobby into a business. The key is to stay on top of things and make it a HABIT! Don’t wait until the last minute to add everything up – you should be tracking your revenue consistently! To do this, you can use an accounting app, such as Wave, or use Excel if you would prefer to log your revenue and expenses manually.
Tip number three is to know your financial statements! There are three of them: the profit and loss statement, the balance sheet, and the cash flow statement. The profit and loss statement, also called the income statement, gives you a summary of costs, revenues, and expenses over a specific period of time. This will help you assess the profitability of your business and make smarter financial decisions. Second, there’s the balance sheet which shows what position your company is in financially at a certain time. It tells you your total assets, which is just the sum of your equity and liabilities. Last, we have the cash flow statement which displays your increases and decreases in cash. The statement organizes your money into three different categories so you can better see where it is coming and going: operations, investing, and financing. Knowing how to properly read and utilize these documents is a hugely important step on your financial journey!
My final tip is to use the accrual accounting method instead of cash accounting. While cash-based accounting can be easier, it is not as common since it only accounts for money after payments go through. On the other hand, accrual accounting recognizes earned revenue and billed expenses, regardless of whether or not official payments have been made. As a result, the accrual method more accurately depicts the health of your business.
I hope my advice is useful to you as manage your new cash flow! It can be a lot at times, but don’t give up – you’ve already made it this far!!