Small Business Financial Success 101: The DreamSpring Guide

    February 19, 2024

    You know that to succeed as a small business owner, you need sound financial documentation. If you’re unsure where to start don’t worry. We’ll review financial statements, accounting software, taxes, best practices, and where you can go to connect with an expert.




    Starting a small business can seem like a big challenge, especially if you don’t have a financial plan in place. This guide will walk you through the financial documentation you need to thrive. From financial statements to tax preparation, a sound financial foundation can help your business well into the future. We’ll highlight best practices and when to connect with a professional. 



    Small Business Financial Success 101 Quick Links



    Building Financial Statements  

    Creating accurate financial statements is a fundamental aspect of managing a small business. Financial statements provide a snapshot of your company's financial health, which can help you in decision making, as well as help investors and lenders understand how to best support your business.



    The core financial statements most beneficial to you and others are the Income Statement, Balance Sheet, and Cash Flow Statement — these documents should be part of your business plan and reviewed regularly. Your business financial statements will help you identify if there are any financial challenges you need to address. 



    The Basics of Financial Statements 

    Your Income Statement provides a summary of your business revenues, expenses, profits, or losses over a specific period of time. These are typically prepared monthly or quarterly. Your Balance Sheet shows your assets, liabilities, and equity of any shareholders at a specific point in time, providing a broad view of the business. Your Cash Flow Statement details the inflows and outflows of cash during a specific period, categorizing the income and expenses into financing and operating activities.

    To prepare these documents, you’ll need to access relevant financial data, including your sales and revenues, expenses, any debt obligations, and significant financial transactions. Once you have this information at your fingertips, you can begin preparing your financial statements.






    Income Statement (Profit and Loss Statement)

    For your income statement, start by listing all sources of revenue, including sales of your products or services, interest income, and any additional revenue streams that bring resources into your business. 

    You’ll then look at your cost of goods sold, or the direct costs associated with producing and delivering your goods or services. This includes materials, labor, and any related overhead (such as postage).

    Your gross profit is calculated by subtracting the cost of goods sold from your revenue sources.

    To calculate your operating expenses, collect all related bills such as rent, utilities, salaries, marketing costs, and administrative expenses.

    Subtracting your operating expenses from your gross profit gives you your operating income. This represents the profit or loss generated by your core operations.

    You then calculate your net income by accounting for any additional income and expenses that aren’t directly tied to operations. Once you have added or subtracted these items, you will arrive at your net income, which represents your company’s overall profitability.


    Balance Sheet 

    You begin your balance sheet by listing all assets, including active and current assets (such as cash on hand, accounts receivable, etc.) and non-current assets (equipment or property) and classify them into long-term and short-term categories.

    You’ll similarly list out your liabilities, such as accounts payable, any loans you’ve taken out, and other debt obligations. You’ll distinguish between current liabilities (due within a year) and non-current liabilities (due beyond a year).

    To calculate the shareholder’s equity, you’ll subtract total liabilities from total assets, which represents the interest of the owners in the business.


    Cash Flow Statement 

    To build your cash flow statement, you’ll start by listing all operating activities, recording income and expenses from day-to-day operations, including receipts from customers, payments to suppliers, and operating expenses.

    You’ll take similar action for investing activities, which documents any transactions related to investments, such as the purchase of equipment or property.

    Likewise, you’ll list financing activities for any cash flowing from the purchase of stock, obtaining or paying a loan or line of credit, or any dividends from transactions.

    You’ll summarize the cash flow from your financing, investing, and operating activities to calculate your net cash flow. This will tell you whether your small business generated or used cash during the time period reviewed. 


    Best Practices for Financial Statements 

    As it can be incredibly tricky to track financial statements by hand, dedicated software is available to help streamline the inputs and calculate financial statements for you. Popular tools include Wave, QuickBooks, or Xero, and some don’t carry a cost. QuickBooks also offers printable templates and Excel templates if you would like to calculate your financial statements without software. SCORE offers free templates as well.   Financial_Success_icon2


    DreamSpring_Financial_Planning_101_photo11Don’t forget that financial statements represent a snapshot in time, so you’ll want to update them regularly to reflect the most current financial position of your small business. These documents will tell you if you need working capital, or if your business is generating revenue or taking a loss, shaping your decisions. You don’t want old financials driving your decisioning!

    Financial statements can often be time-consuming and overwhelming, especially if finance isn’t your favorite subject. Financial advisors, accountants, tax preparers, and other financial professionals can ensure accuracy and compliance with accounting standards — all while freeing up valuable time for you. Remember that your time is a business cost, and it may be more efficient and cost effective for you to hire support.


    Budgeting for Small Business  

    Just like you would budget for your personal savings and expenses, budgeting for your small business details your financial ins and outs. Then, as you compare your budget to actual income and expenses, you can see if you are over or under budget, shaping decisions large and small for your small business.   Financial_Success_icon4


    DreamSpring_Financial_Planning_101_photo3Budgeting traditionally begins by using past figures, so you’ll want to start by gathering your previous monthly or yearly financial statements. You can then identify trends and see where you anticipate your expenses and income to be. If it has been a busy time for your business, you should adjust your budget accordingly. If things have been slow, you can make accommodations in your budget to prepare for a reduction in income/sales. Many businesses are cyclical; they have a busy and slow time of year, and your budget should reflect this.

    You’ll want to make sure that your budget reflects your revenue and fixed costs and includes estimations for any costs that aren’t fixed (meaning they happen on a predictable basis). Examples of variable expenses include cost of goods, utilities, hourly salaries, etc.

    When building your budget, it is also important to set aside rainy-day funds, also known as a contingency fund. This helps ensure that your business has a pool of capital in an emergency.

    Once you’ve outlined your revenue and costs, you can assess your profit, or net income. You may find that your business, particularly in the early stages, doesn’t have a profit. This can help you adjust other elements of your budget to help break even or identify additional revenue or capital needs.


    Small Business Insurance 

    As a small business owner, investing in insurance is a crucial step to safeguard your enterprise against potential threats. Let’s explore the different types of insurance that small business owners should consider to mitigate risks and ensure long-term success.   Financial_Success_icon6


    General Liability Insurance

    • What It Covers: General liability insurance is a foundational coverage that protects businesses from common risks. It provides coverage for third-party bodily injury, property damage, and advertising injury claims. This insurance is essential for businesses that interact with the public, clients, or other businesses.

    • Why You Need It: Accidents happen. If someone is injured on your premises, or your business activities cause damage to someone else's property, general liability insurance provides financial protection. It also covers legal fees in case of a lawsuit, helping you navigate legal challenges without depleting your resources.

    Property Insurance 

    • What It Covers: Property insurance protects your business property, including buildings, equipment, inventory, and furnishings, from perils such as fire, theft, vandalism, and natural disasters.

    • Why You Need It: In the event of property damage or loss, property insurance ensures that your business can recover quickly. It helps replace or repair damaged assets, minimizing downtime and ensuring business continuity. 

    Business Interruption Insurance

    • What It Covers: Business interruption insurance provides coverage for lost income and operating expenses if your business is temporarily unable to operate due to a covered peril, such as a fire or natural disaster.

    • Why You Need It: When unexpected events force your business to halt operations, the financial impact can be severe. Business interruption insurance helps cover ongoing expenses, such as rent, salaries, and utilities, ensuring that your business can weather the storm and resume operations smoothly. 

    Professional Liability Insurance

    • What It Covers: Also known as errors and omissions (E&O) insurance, professional liability insurance protects businesses that provide professional services or advice from claims of negligence, errors, or omissions.

    • Why You Need It: If a client alleges that your professional services led to financial loss or harm, professional liability insurance can cover legal fees and damages. This is especially critical for consultants, lawyers, accountants, and other service-based businesses. 

    Workers' Compensation Insurance

    • What It Covers: Workers' compensation insurance provides medical benefits and wage replacement to employees who are injured or become ill on the job.

    • Why You Need It: Injuries and illnesses in the workplace can lead to significant financial and legal consequences. Workers' compensation insurance not only ensures that your employees receive the care they need but also protects your business from potential lawsuits related to workplace injuries.

    Cyber Insurance

    • What It Covers: As businesses increasingly rely on digital tools, cyber insurance protects against the financial fallout of cyberattacks, data breaches, and other cyber threats.

    • Why You Need It: A data breach or cyberattack can compromise sensitive information, damage your reputation, and lead to legal consequences. Cyber insurance helps cover the costs of investigating and responding to a cyber incident, notifying affected parties, and potential legal liabilities. 

    Commercial Auto Insurance

    • What It Covers: If your business owns or uses vehicles for business purposes, commercial auto insurance provides coverage for accidents, injuries, and property damage involving company vehicles.

    • Why You Need It: Personal auto insurance typically does not cover vehicles used for business purposes. Commercial auto insurance ensures your business is protected in the event of an accident involving company vehicles.

    Product Liability Insurance 

    • What It Covers: For businesses that manufacture or sell products, product liability insurance provides protection against claims related to product defects, design flaws, or failure to warn.

    • Why You Need It: If a product you sell causes harm or injury to a consumer, your business could be held liable. Product liability insurance covers legal fees, settlements, and medical expenses associated with such claims. 

    Investing in the right insurance coverage is a proactive and strategic decision that can safeguard your small business against risks. While the types of insurance mentioned here are fundamental, the specific needs of your business will vary. Consult with insurance professionals to tailor a comprehensive insurance package that aligns with your unique circumstances and needs.


    Small Business Taxes  

    Understanding tax obligations, deductions, and compliance requirements are an important element to your small business’ financial success, and it can significantly impact your financial health. While you should always seek guidance from a tax professional, we’ll provide a high-level overview of best practices and items for you to pay attention to as an entrepreneur.   Financial_Success_icon5



    Business Structure Matters. 

    The structure of your business — whether it's a sole proprietorship, partnership, LLC, S corporation, or C corporation — affects your tax obligations. Each structure has its own tax implications, including how income is taxed, potential deductions, and the complexity of filing. 


    Types of business structures

    • Sole Proprietorship and Partnership: Income is typically reported on the owner's or partners' personal tax returns. 

    • LLC: An LLC can choose how it wants to be taxed. It can be treated as a sole proprietorship, partnership, S corporation, or C corporation.

    • S Corporation: Income passes through to shareholders, who report it on their individual tax returns. 

    • C Corporation: C corporations are taxed as separate entities, with their own tax rates. 

    Keep Accurate Records. 

    Maintaining meticulous records of income, expenses, and receipts is crucial for accurate tax reporting. Use accounting software or hire a professional bookkeeper to ensure your financial records are organized and up to date. This not only facilitates smooth tax filing but also helps you identify potential deductions and make informed financial decisions.

    Know Your Tax Deadlines.  

    Missing tax deadlines can lead to penalties and interest charges. Familiarize yourself with key dates for filing income tax returns, payroll taxes, and quarterly estimated tax payments. Stay proactive and set reminders to avoid late filings, ensuring compliance with tax regulations.

    Understand Deductions and Credits.  

    Identifying eligible deductions and credits can significantly reduce your tax liability. Common deductions for small businesses include expenses related to: 

    • Home office upkeep 
    • Business equipment and supplies 
    • Vehicle uses for business
    • Health insurance premiums
    • Retirement plan contributions 

    You should also look into available/applicable tax credits such as the Small Business Health Care Tax Credit or the Research and Development Tax Credit to maximize your tax savings. 

    Estimate and Set Aside Taxes — Don’t Let Them Surprise You.   

    Unlike employees who have taxes withheld from their paychecks, business owners are responsible for estimating and paying taxes on their income. Set aside a portion of your income throughout the year to cover federal and state income taxes. Quarterly estimated tax payments may be required, and underpayment could result in penalties.

    Stay in Compliance with Sales Taxes.   

    If your business sells goods or services subject to sales tax, understanding and complying with sales tax regulations is essential. Determine whether your products or services are taxable, register for a sales tax permit, and collect and remit sales tax to the appropriate tax authorities.

    Plan for Succession and Estate Taxes.  

    Considering the long-term future of your business involves planning for succession and potential estate taxes. Develop a comprehensive estate plan that addresses the transfer of your business assets and accounts for potential estate tax liabilities.

    Tax laws are complex and subject to change. Enlisting the expertise of a certified tax professional or accountant can provide invaluable assistance. A tax professional can help you navigate tax regulations, identify opportunities for savings, and ensure compliance with current tax laws.

    Your financial success depends on mitigating risk, whether through taking out the appropriate insurance coverage or preparing for relevant taxes. Your financial statements — both budgets and documentation — play a key role in how you’ll spend and seek capital. Please make sure to seek out expert guidance when needed.



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