There are many upsides to running a business from home, but nothing is perfect.
One disadvantage is having to manage your own finances. Most business owners are not financial experts, which makes the prospect of being the master of your own money pretty daunting. As a result, many struggle to manage appropriately and sooner or later the business accounts are a complicated mess of figures and confusing spreadsheets.
However, there is hope. By following good accounting practices and knowing what to look out for, you can keep your accounts manageable.
1. Keep Your Business and Personal Finances Separate
Your personal and business finances should never interweave. Having invoices paid into, and expenses paid out of, your personal account is a surefire way to problems. Doing so makes it impossible to know exactly what is personal and what is business, making finance management difficult. Not to mention, if the taxman comes a-knocking, they’ll have a harder time working this out than you do.
2. Know Your Cash Flow
Cash flow is exactly what it sounds like: the amount of money going in and out of your business. Imagine a river of money with your business acting as a dam. The water flowing into your business is gross profit, and the water runoff is your net profit.
Too many businesses focus on gross profit and fail to understand the significance of net profit and cash flow. Ignoring your cash flow results in an inaccurate picture of your business’s financial health, which makes it far easier to end up with accounts that don’t reflect your actual status.
3. Dedicate Time Every Day to Finance Management
Home businesses are often micro-businesses, which means your finances aren’t usually as complex as a larger company. That doesn’t mean things can’t get messed up, though.
Fortunately, micro-businesses often have accounts that are far easier to manage with just a small amount of input. By dedicating 10 minutes at the end of your working day to your finances — making sure you’ve recorded everything you need to, paying off bills, and ensuring the numbers are right, etc — you’ll find you have much more control over your accounts.
4. Be Aware of Your Accounts Payable
Accounts payable is a term used to describe money your business owes. It could be a loan, payments for equipment, money owed for supplies, or a mortgage on office space. Most small home businesses don’t have large amounts of creditors, but it is still vital that you keep yourself aware of who you owe what.
If your accounts are in need of a tidy up, one of the highest priorities you should have is ensuring you manage and clean up your accounts payable. This means understanding exactly who you need to pay and when payments are due. Unmanaged payable accounts can lead to massive problems with creditors that could potentially destroy your business. Rein them in immediately.
5. Close All Old Invoices and Bills
How do you clean the house that your small business is based in? You clear out the clutter. How do you clear up your business accounts? You do the same.
Old invoices and unpaid bills wrack up huge problems for your business; they skew numbers. If you have open invoices that haven’t been paid, be swift in your action to clear them up and get the money you are owed. If you have old invoices that have been paid but are just sitting around in your accounts folders, get those archived and out of the way.
The only things you want to be affecting your accounts are invoices for current jobs and bills for ongoing projects. By sorting old bills and invoices, you can get your financial numbers up to date and clear out the clutter.
6. Revisit Budgets
Too many businesses set their budgets at the beginning of the year and religiously stick to them. This is problematic. A budget is usually based on projections, not cold-hard facts. If you are working off an inaccurate budget, you could find yourself falling deeper and deeper into financial problems.
For example, imagine you looked at your projected income and surmised you could budget $250 per month for travel expenses. Business is slower than usual, but you continue to work from that budget as it is what you set for the year.
Every day you spend working from inaccurate budgetary information, your accounts get worse. Budgets should be revisited on a regular basis and revised to reflect the current financial situation of your business. By doing so, you can avoid disastrous overspending. Or, in the case of growth, you can ensure you are investing an adequate amount of money into your home business to ensure it continues to develop.
7. Take Advantage of Specialist Software
Numerous examples of accounting software exist to help you keep track of your business finances. While many still stick to filing cabinets and spreadsheets on Microsoft Excel, even the smallest of businesses can benefit from specialist software.
Designed to help you easily understand and control your accounts, this type of software is vital for anyone who finds themselves bogged down in financial misery. From record keeping to invoice monitoring, it essentially puts all the necessary information in front of you, allowing you to get an overview of all the ins and outs of your business finances.
8. Maintain Your Records
Bookkeeping is the cornerstone of good accounting practice. Without a strong foundation of recordkeeping, you cannot possibly hope to have well-managed finances. Bookkeeping allows you to track everything, every cent that enters and leaves your business.
Bookkeeping is simple. Just record the figures from your invoices, receipts and other records in one place, such as on accounting software, and maintain them, always updating when new records come along.
The downside of not maintaining records is that things can quickly snowball, as you have no idea of exact figures. Guesswork is not a good idea when it comes to managing business accounts; things can get messy fast. Bookkeeping takes financial guesswork out of the equation and allows you to know exactly what you’ve been paid and what you’ve spent.
9. Reconcile Your Historic Transactions
Recording all your income and outgoings is important, but after they’ve been noted down in your spreadsheet, software, or massive 19th-Century-style ledger, don’t discard them. Keeping evidence of your business transactions is not only important for tax purposes — in the case of an audit — but it also benefits your accounts through data reconciliation.
If your accounts need a tidy, you can return to these historic transactions and compare them to your current books. This ensures accuracy in your current records and helps you fill in any blanks that may have occurred due to lax account maintenance.
10. Review Your Finances Monthly
It is not enough to maintain your finances. You have to know what exactly is going on with them. Monthly reviews are a vital part of keeping your accounts healthy, as they allow you to take a step back and analyse your financial performance.
The advantages of reviewing your finances monthly are that you can track progress. Look out for pitfalls and become keenly aware of your current financial situation as a whole. Avoiding monthly reviews means you won’t be prepared for potential problems and you won’t have that keen awareness of your business’s financial health, which makes it far easier for your accounts to run away from you.
11. Set Financial Targets
Financial targets are goals established at the beginning of the fiscal year that indicate what position you’d like to be in when said year draws to a close. While they may not seem like a tool that can be used to keep accounts tidy, they actually have a major role to play.
Financial targets range from high profits to keeping things on an even keel. At the start of the year, you need to look at your business and decide what sort of target you want to aim for. Once you have that goal, you’ll be able to track it against your accounts. If your goal is to be more profitable, for example, you can use it to monitor your accounts and make sure they reflect your intended end-game result.
12. Reevaluate Your Outgoings
Too often small business owners set up financial links and leave them standing. As a result, you can end up paying high interest on loans, overpaying suppliers and racking up credit debts your company simply doesn’t need.
Invest time in looking over your accounts payable and see if you can reduce costs by switching your custom to other businesses. You may also be able to consolidate payments to make your accounts easier to manage. Just because something worked for your business before, doesn’t mean it works now.
