Behind every profitable and efficient small business is the effective accounting and management of its finances, which includes everything from start-up financing and debt to bookkeeping and cash management. This section contains articles and resources to help you get a grip on your business operation's finances, covering such topics as how to read a balance sheet, warning signs of embezzlement, what to expect when estimating business start-up costs, and how to secure a small business loan.
Small Business Accounting
Accounting and financial management are crucial functions for any business. Even the best business plan can fail without proper financial planning. Accountants are tasked with interpreting financial data, assessing a company's current situation, and giving advice for the company's future. Bookkeeping, which is integral to accounting, is the process of recording the data used in accounting.
The key to successful accounting is to maintain accurate records of expenses, revenues, and related information. These records are kept in the general ledger, which is a single document showing the company's financial health.
One of the accountant's goals is maintain proper cash management. Companies regularly take on debt or trade equity for capital, usually to help them grow or expand, but this has to be kept in check and balanced by a sensible cashflow.
Credit and Debt Collection
Companies that extend credit to their customers -- usually through billing -- usually are able to do more business. Customers are more likely to take advantage of special deals or big purchases if they don't have to pay for it all up front. But credit comes with a risk. Customers who fail to pay, or pay late, can create cash flow problems for your business. You will want to implement an effective debt collection procedure in order to protect the interests of your business.
In addition, you will need to comply with the Truth-in-Lending Act (which regulates interest charged on overdue payments) and other laws related to credit and debt. From a practical perspective, it's typically more effective (and customer-savvy) to save the use of debt collection agencies as a last resort.
Business Loans and Investors
It takes capital to start any business. How much will depend on the startup costs, including labor and supplies, and may require several loans or cash from investors. The two main types of outside financing for a business are debt and equity, each with its own advantages and disadvantages.
An equity investment is essentially an exchange of equity -- a portion of the company -- for capital. Equity investors, particularly venture capitalists, not only own a portion of the company (in proportion to the investment) but also have some say in the company's executive management. But the main advantage is that you don't have to repay the cash investment.
When securing a business loan, in contrast, you won't trade away any equity and will retain full control of your business. The downside is that loans are often difficult for small businesses to obtain and incur interest. And if you default on the loan, you may have to forfeit a home, car, or other collateral.
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