Hey there, future financial wizards!
Managing your business finances might sound like a big, scary task, but it’s actually super important and can be quite straightforward once you get the hang of it.
In this guide, we’ll break down the basics of accounting to help you keep track of your business finances all year long, using simple language and practical examples.
Imagine you have a lemonade stand.
You need to know how much money you’re making, how much you’re spending on lemons and cups, and whether you’re making a profit or not.
Keeping track of your finances helps you:
When you know where your money is going, you can make better decisions about your business.
For example, if you see that your lemonade stand is spending too much on lemons, you can find ways to cut costs.
By tracking your finances, you can set goals for your business and create a plan to achieve them.
Maybe you want to expand your stand or save up for a fancy new blender.
Proper financial records are essential for tax purposes.
You want to make sure you pay the right amount of taxes and avoid any trouble with the tax authorities.
Here are three fundamental financial reports that can help you understand how your business is doing:
This report shows how much money your business made (revenue) and how much it spent (expenses) during a specific period, usually a month or a year.
The difference between revenue and expenses is your profit (or loss).
Example: If your lemonade stand made ₦500 in one month and spent ₦200 on lemons, cups, and other costs, your profit for that month would be ₦300.
The balance sheet gives you a snapshot of your business’s financial health at a specific point in time. It shows what your business owns (assets), what it owes (liabilities), and what’s left over for you (equity).
Example: If your lemonade stand has ₦800 in cash (an asset) and owes ₦200 to the lemon supplier (a liability), your equity in the business is ₦600.
This report tracks the flow of money in and out of your business. It helps you see how changes in your business operations affect your cash position.
Example: If your lemonade stand receives ₦400 from customers and pays ₦100 for lemons and ₦50 for cups in a month, your net cash flow is ₦250.
Now, let’s dive into the practical steps:
Record every financial transaction, no matter how small. Use tools like spreadsheets or accounting software to help you stay organized.
Example: Write down each lemon purchase and customer sale in your ledger.
It’s essential to keep your business finances separate from your personal ones. Open a business bank account and use it exclusively for business transactions.
Example: Deposit all your lemonade stand earnings into your business account, and pay for lemons and cups from that account.
Reconciliation means making sure your records match your actual bank and cash balances. This helps you catch any mistakes or discrepancies.
Example: Compare your bank statement with your recorded transactions to ensure they match.
Use accounting software or templates to generate income statements, balance sheets, and cash flow statements.
These reports will give you a clear picture of your business’s financial health.
Example: Use a spreadsheet to calculate your monthly profit and loss.
Regularly review your financial reports.
Look for trends, such as increasing or decreasing profit, and identify areas where you can improve.
Example: If you notice that your monthly profit is dropping, investigate why and make adjustments, like raising your lemonade price.
Set aside a portion of your earnings for taxes.
It’s a good practice to consult with a tax professional to ensure you meet your tax obligations.
Example: Calculate your estimated quarterly tax payments based on your profits.
As your business grows, you might want to consider hiring an accountant or financial advisor to help you navigate more complex financial matters.
Example: An accountant can assist you in preparing your annual financial statements and tax returns.
Remember, keeping track of your business finances is a skill you can learn and develop over time.
It’s a crucial part of running a successful business, and with practice and the right tools, you’ll become a financial pro in no time! 📊💼