Although your business may be based on an aesthetic vision or a personal ideal, it will only be able to operate successfully if it is financially sound. Most businesses pass through startup and growth periods spending more than they earn, however, the long-term health of any company depends on ultimately earning more money than it spends. In addition, financially viable companies must manage cash flow effectively enough to avoid debilitating finance charges and have enough capital on hand to cover basic expenses.
Bookkeeping is the process of tracking your company's daily financial activities, such as sales and expenditures, and periodically compiling this information into reports, such as profit and loss statements and balance sheets. Bookkeeping is important because it gives you feedback about whether you are making ends meet. It also helps you to identify areas that need adjustment. For example, if your bookkeeping records indicate that your payroll is a much higher percentage of your gross sales than the average for your industry, use this information to create efficiencies, cut payroll costs and make your business more financially sustainable.
Most business avail themselves of some type of financing, such as business credit cards, business lines of credit or business loans. Business financing can be a valuable tool that helps your business grow and enables you to make ends meet during slow periods. However, business financing must be carefully managed to ensure that you make smart choices about credit options and make payments on schedule to avoid costly finance charges.
Sound financial management ensures that your company is able to meet day-to-day expenses, having enough product on hand to meet customer demand, having enough money in the bank to pay your staff on time and having enough capital ready when your business has the opportunity to grow. Cash flow management involves keeping accurate tabs on regular expenses and income, being resourceful enough to have alternative sources of funding available in case of emergencies and having good enough judgment to determine when to take advantage of these emergency funding options.
Budgeting is the area of financial management that involves planning for typical and atypical expenses. It is the process of deciding the best time to make a particular purchase based on the amount of money your business is currently earning and your expectations about how much it will earn in the future. Sound budgeting is important because it enables your business to approach financial decisions with sound information and sufficient resources.