Running your own business can be a full-time job, and it’s often easy to overlook the importance of keeping your financial affairs in order. So to help boost your money management knowledge, we sat down with Randon Kelly, our Vice President of Finance, to answer important financial questions related to your online business.
In part one of our financial series; check out Randon’s advice to help exercise your money muscles.
What are some of the main finance/accounting pitfalls small businesses face today?
Two areas that pose challenges for small businesses are poor cash management and inadequate financial planning. It’s important to understand these issues to identify if they’re affecting your online business.
Symptoms of poor cash management include:
- Bouncing checks
- ‘Robbing Peter to pay Paul’ (taking money from one place to give to another)
- Rising debt (most often credit card debt, which is the most expensive to pay off)
- Co-mingling personal funds with business funds
Not spending enough time on financial planning could result in:
- Making it difficult to weather the slow periods
- Limiting the ability to take advantage of opportunities that arise
- Making it tough to stay on top of the various State, Federal, and Payroll Tax payment requirements
What are some best practices for managing money?
It’s important to completely separate business and personal funds. You should also be using a savings account to set aside funds that need to be used for future payments such as inventory repurchases and tax payments such as Sales & Use Tax. Additionally, it’s critical to establish and adhere to a daily/weekly routine where the company books are updated consistently and checks are cut once a week.
Here’s an example of a schedule that could be used (italicized items are daily activities):
I’d recommend working with a bookkeeper to ensure this routine is established and followed. Organization is key to so many elements of managing a business.
Where appropriate, work to align income with corresponding product or project expenses. In other words, use the money received to pay for any remaining outstanding expenses associated with the product or service for which you received payment.
How does one begin to financially plan or forecast for the business?
Historical information is the best indicator of future performance. Working to establish a meaningful financial history is important and the weekly routine mentioned above would be extremely helpful in this context. A monthly Profit and Loss Statement for the past 12 months goes a long way toward understanding key business trends and dynamics such as peak and slow periods as it relates to Income and Expense Flows.
With the use of historical reference, it’s best to begin projecting revenue based on volume/units sold with some basic assumptions around average revenue/unit. Use the historical information to understand variable costs (costs that vary with revenue) to make some basic assumptions around average variable cost/unit so they can trend with revenue. Also, use the historical information to understand fixed costs. Build out a 12 month projection using a spreadsheet and, be sure to document your assumptions. You’ll then want monitor sales and expenses in real-time to refine those assumptions and reforecast.
We hope these expert insights have empowered you to become more fiscally aware. For more financial info, stay tuned for our next edition of Tips from the Top, where Randon explains how to stay on top of taxes, increase your chance of securing loans and more.
Randon Kelly, Vice President of Finance, is a key member of the decision-making team, working closely with executive leadership to drive growth and efficiencies. Kelly is responsible for the financial planning, analysis and reporting activities.
Kelly’s leadership experience includes three years at GE Capital, 15 years at Dell, and serving as the Finance Director of Andrew Harper. For the two years prior to joining Volusion, Kelly founded and ran his own financial management consulting company where Volusion was a client. This experience cemented his passion for helping small and medium sized businesses achieve success.
A 5th generation Texan, Kelly grew up overseas in Greece, Saudi Arabia, and Brazil but saw fit to return to his native land where he earned both a BBA and an MBA from The University of Texas at Austin’s McCombs School of Business.