- Difficulty covering payroll or making that high-efficiency equipment upgrade…
- Not sure which products or services are most profitable… or even what the overall company profitability is…
- Business tax burden seems high…
How many small business owners think they’re expert in small business accounting & financials? Not many. You’re not alone if you believe there are probably ways to improve your small business accounting & financials… if only you knew what they were!
This is the 5th post in our SERVANT Whole-Business Model blog series – the “A” of SERVANT is for “Accounting & Finance.”
We’re covering 7 steps to small business accounting & financials to build wealth. It’s every step you need to have confidence that you’re managing your small business accounting & financials properly and maximizing the profitability of your business.
At the end of the day, cash flow is the lifeblood of any small business. So this post focuses on 2 key practices: maximizing cash flow and creating information you can use to manage your financials, and your business, with confidence.
7 Steps to Small Business Accounting & Financials to Build Wealth
Here are the 7 steps we lead our clients through when coaching around small business financials & accounting:
1. Identify Product Profitability & Create Financial Reports
You want to start by making sure that your basic product or service is profitable. Often the small business owner isn’t getting regular financial reporting so they don’t know what’s profitable and what’s not profitable. Now’s the time to create regular financial statements that identify key financials that tell you whether you’re making money on the basic product and service and whether you’re overcoming your cost of overhead.
2. Implement Tax Strategies & Market-Based Wages
A basic good practice is to identify ways of reducing your tax burden. This improves your cash flow.
Frequently small business owners pay themselves whatever they have available—which is often not very much. So another basic good practice is to pay yourself a market wage for the work you’re doing. Here’s a good article from Forbes about how to do it.
3. Calculate Labor Productivity & Break-Even Level
One of the hidden cash flow drains is not using labor productively. You don’t always see it because you’re paying employees a certain amount of money to do a certain amount of work. But often you don’t know what percentage of their time is actually producing revenue. Look at each specific job and determine how much time it takes up vs how much time you’re paying them.
Next you want to determine if the business is producing enough revenue to cover its overhead, i.e. is your gross margin higher than your overhead expenses (or fixed costs).
4. Pay Off Business Debt Including Lines of Credit
Assuming 1-3 is being done well, you’re making a regular profit. So it’s time to improve your balance sheet and a great way to do this is by paying off debt.
5. Create a Capital Safety Net & Manage Cash Flow
You want to have enough money in the bank to confidently run your business… to make payroll and have at least 2 months of payables covered. At this stage the business is at an optimal level of cash flow… you know where your cash is going, you have the right amount to function effectively, accounts receivables are paying regularly, and accounts payables are minimized.
6. Maintain 10-15% Pre-Tax Profit During Growth
Your goal is to crank up profitability into the 10 -15% range which is generally considered healthy. You want to be in this range even during times of growth (since growth tends to suck up a lot of cash).
7. Effectively Utilize Profit & Build Wealth
Here’s where you leverage your profit… like using it to purchase another firm, expand product lines, hire an expert, or buy new more efficient equipment. Building your personal wealth is when you have money to invest in endeavors outside the business as well as inside.
You don’t have to have a degree in finance to be confident about your small business accounting & financials. The 2 keys are getting strong, steady cash flow and creating consistent reporting of a few key financials.
Following these 7 steps can boost your confidence in your business-running abilities and give you peace of mind that what you’re doing each day is driving profit and growth.
Learn more about small business accounting and financials in our Growth Plan Work Shop.