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. |
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Small Business Financial Success 101 Quick Links |
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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. |
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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 StatementsYour 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. |
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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.
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.
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.
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. |
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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.
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. |
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.
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. |
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.
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. |
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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
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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.
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.
Identifying eligible deductions and credits can significantly reduce your tax liability. Common deductions for small businesses include expenses related to:
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.
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.
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.
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.