Financial management 101 for small businesses

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Basic financial management is the number 1 thing every small business owner should know how to do. You need to know how to do basic bookkeeping, how to calculate your financial position, and how to forecast when + how much money is coming in and going out.

When you talk about bookkeeping, budgeting and financial forecasting, many people start worrying because they think it is too hard. Or they believe that since they never got high grades in maths, they will not be able to do financial management. Let me tell you right now: that is a lie.

Question: you have 5 US dollars in your hand. You want to go to the biggest market in the capital. Is the 5 USD enough to go there and come back? How much money remains after you return home? If you are able to answer these questions, you are able to do bookkeeping, forecasting and budgeting. You only need to know which steps to follow. I am going to show you the steps in the upcoming blog posts.

Today, let’s start by looking at recordkeeping.

Small business recordkeeping 101

If you keep good records, you will be able to properly manage your business. Good records will tell you how your business is doing, will alert you to any cash flow issues, and will help you to take business decisions based on data. If you pay taxes, it will also help you calculate how much you are supposed to pay.

Good records tell you whether you are making a profit or loss. They also tell you which products or services to add which ones you should drop. Good records will show you what kind of marketing is having the biggest effect. And it will tell you which customers to give more attention and what kind of new customer to look for.

All small business owners should keep the following records:

1. Revenue and expenses

Every transaction that is carried out should be recorded. Meaning: you should be able to account for every shilling, dollar, pound, and euro that is coming in or going out.

2. Cash

If you have a cash-based business, this will be covered by your recordkeeping for revenue and expenses. However, if you have both digital and cash-based transactions, it is likely that you will have petty cash in your business. If so, you need to keep a record of it.

3. Inventory

Having good inventory records is of critical importance.  

  • It helps to prevent theft. If you know what is supposed to be in stock and what you have does not equal what is on paper, you can train your staff, improve security or take action against employees.
  • It tells you which are your fastest moving products. When you combine this with your pricing data, you can also determine whether your fastest-moving products are also the products that bring you the highest profits. Or whether they cause losses.
  • It helps you to know which products you should add in stock when. For example: most business owners know that it makes sense to increase inventory of certain products during the Christmas season. But which products are the best performers in April and August? When you combine this data with your marketing, it will help you to improve your marketing strategy and boost sales during the entire year.
  • It helps you to do inventory forecasting because it shows you selling patterns. This will help you know how much to save for certain time periods so that you can buy additional inventory. It will also show you which products are starting to lag (or pick up) so that you can make decisions as to which strategy to follow.

    For example: your data may show you that most of the time, product A and B have stable sales. But whenever product A starts selling more, sales drop for product B, but sales of product C are also increase and the percentage increase is actually higher than product A.

    Based on this data, you may decide to sell product A + C as a package and increase the price during certain times of the year. Or to run an additional marketing campaign to boost sales even further.

4. Accounts receivable and accounts payable

Who are the people that bought from you on credit? When are they supposed to pay and when should you start doing follow ups to get your money? Are the ones who give you headaches because you are always running behind your money good or bad customers? Good records will give you the answers to these questions.

The same applies to your accounts payable: the suppliers that you bought on credit from. When are you supposed to pay them? Is your expected cash inflow at that time enough to cover payment or should you start saving some money?

5. Salaries/payroll

If you have employees and you pay taxes, you need to make sure that you keep any and all records that the Revenue Authority or Ministry of Labour require you to maintain. But even if you have an informal business, it is a good idea to keep records of when you paid people (and have them sign for receipt of the money).

6. Small business taxes

Finally, if you pay taxes, having good records will make it easier for you to do your taxes. Whether every quarter or annually. This will help you avoid problems with the Revenue Authority.

You will also have a record of how much you paid in taxes. This will help you with forecasting  because you will know how much money needs to be in your financial reserves at a specific time. It will also help you when you are creating a small business budget because it is one of the factors that will determine how much profit your business will make.

How to start?

Note: I am focusing on small businesses that are cash-based (meaning: all your business transactions are cash-only) or that do limited digital transactions, like using mobile money transfers, mobile banking or telebanking.

If you are not yet doing so, your first action should be to start recording all your income/revenue and all your expenses on a daily basis. If this is your first time recording data about business transactions, I recommend you use a dedicated notebook. Or Excel document.

Set it up like this (but the data I used are just examples):

DateTypeDescriptionIncomingOutgoingCategory
Jan 2, 2021PersonalNotebook – 5 
Jan 4, 2021BusinessSale of product A250  
Jan 9, 2021BusinessPhone top-up – 25 
Jan 11, 2021PersonalTransportation – 20 
Jan 11, 2021BusinessTransportation – 80 
Example of record keeping

Explanation:

  • Date: the date you received this income/revenue or paid this expense
  • Type: whether this is a business expense or personal/private expense.

    If you keep your business and personal expenses 100% separate, then all the revenues and expenses will be business. But I have yet to meet the business owner who manages to keep business and personal 100% separate!

    If the expense is mixed, like the example I am showing for January 11, split it. For example: you paid transportation to go somewhere and you combined business and personal errands. You paid 100. Most of what you did was for your business. For that reason, you estimate that 80 was business expense and 20 was personal expense. You record it like in my example.
  • Description: what was the revenue or expense?
  • Incoming: this is where to record money that you receive, whether from selling something or by someone giving you money for free.
  • Outgoing: record all expenses here. Make sure to add the ‘-‘ (minus sign).

You are now ready to start recording your transactions. When you have collected data for a few months, you will be able to use it in your business budget. We will talk about how to do this later.

Recordkeeping FAQs

1. Who should do recordkeeping?

Every business owner should keep records.

2. What should I use to do recordkeeping?

You can do your record keeping on paper, using Excel or LibreOffice Calc (a free Office suite), or in a dedicated accounting software programme.

3. When should I start recording my revenues and expenses?

Start today! No need to wait for the beginning of the month. Or the beginning of the new year. The important thing is to start recording.

4. How long should I record my revenues and expenses?

At least 3 months. However, it is better to do it for 12 months. This will give you a good overview of the patterns in your revenues and expenses.

It is even better to keep doing it continuously. For example: I started recording my personal revenue and expenses in 1995 but I was not serious about it. Since 2000, I have been diligent to record all data. I do so for both my personal and business activities.

5. Why should I differentiate between personal and business expenses? I am a solo business owner and all expenses go out from the same place.

The most important reason to do so is to know how your business is actually doing. For example: your business is making a yearly profit of 5000 USD based on business revenue and business expenses. You also use your business to pay for all personal expenses. Your personal expenses are 5700 USD. So, every year, you lack 300 USD.

If your business and personal activities are not separated, you may believe that your business is not succeeding because you always lack money. When rather, the problem is that your personal expenses are too high as compared to your profit.

You will need to look for more money. But the approach will be different depending on whether it is your business that is struggling or your personal expenses that are (too) high.

In the above example, your first step would be to evaluate your personal expenses before taking any decisions that will affect your business. You will try to find ways to reduce your personal expenses or increase your personal income. This could be through side hustles or by asking a family member to take up part of the burden.

Unless you are satisfied that you have done your best to control your personal expenses, you should not take any action that will affect your business. Why? Because our expenses, and particularly our personal expenses, will always increase unless we control them firmly. This is why it is possible to see very rich people become bankrupt. They were not able to control their spending.

Join me again next week. We will look at how to create a sales forecast. A sales forecast is a crucial piece of information for your budget.

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Key message

Start recording your revenue and expenses today! It is the starting point to being able to manage your business well.

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