Basic Financial Management for Small Businesses

For owners of small businesses, financial management is a key survival skill. Without sound financial management, no amount of marketing, product development or customer service acumen will be enough to keep your business afloat. Good financial management practices give small business owners the tools they need to efficiently and effectively collect, keep track of and invest their money properly.

Poor financial management is a major reason why many small businesses fail. Even if you entrust your bookkeeping and accounting work to a professional, as the owner of a business you still need to understand the basics of financial management in order to make sound decisions.

The Basics of Bookkeeping

Good financial management starts with keeping good financial records. Even if you hire a bookkeeper, it’s important to understand the fundamentals of bookkeeping in order to supervise your bookkeeper properly, as well as being able to make well-informed decisions about budgeting, borrowing and other important choices.

For bookkeeping purposes, every business transaction you make should be documented by a check, receipt or sales invoice. These transactions should be entered into a journal, which can be a chronological record of sales and cash receipts, cash disbursements or other special entries.

Information entered into the journal should also be entered into a ledger. While journals provide documentation of transactions on a chronological basis, the ledger categorizes transactions according to which accounts they impact. Your company’s general ledger reflects your business’ balance sheet, revenues and expense accounts. The general ledger is completed at the end of each accounting period, when the information from your journals are categorized and posted into your general ledger.

In the double-entry accounting method used by most businesses, each transaction will impact two accounts, as every transaction will consist of a debit and a credit. One account will likely be a balance sheet account, while the other will be made into an income or expense account.

As an example, if you ran a plumbing business and charged $1, 000 for a service, the service would be entered twice, once as a $1, 000 invoice in the debit section, and once as $1, 000 as income in the credit section. Once the fee was paid, you’d write up the $1, 000 in your accounts receivable in the credit section, and $1, 000 in the cash section of your balance sheet, a debit section.

When an accounting period ends, all of the account balances are added up and entered into the general ledger to produce a trial balance. In the trial balance, the debit balances in your ledger sum should be equal to the sum of the credit balances. If they don’t balance out, you’ll need to investigate to see where the errors lie.