New business owners and non profit executives must develop at least basic skills in financial management. Assuming others in the organization to manage finances is clearly asking for trouble. Basic skills in financial management start in the critical areas of cash management and bookkeeping, which should be done according to certain financial controls to ensure integrity in the bookkeeping process. New owners and non profit executives should soon go on to learn how to generate financial statements (from bookkeeping journals) and analyze those statements to really understand the financial condition of the business. Financial analysis shows the "reality" of the situation of a business -- seen as such, financial management is one of the most important practices in management. This topic will help you understand basic practices in financial management, and build the basic systems and practices needed in a healthy business.

Basics of Financial Management

Your Most Useful Resource: A Treasurer

If your small business is a corporation, you would do well to find someone experienced in financial management and encourage them to be your board treasurer (your board chair has this responsibility to find someone suitable, as well). Therefore, it's important to understand the role of the board treasurer.

Islip + Company CPAs offer personalized service to help you with these issues.  Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.  With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing. "It's not just about the numbers... it's what's behind the numbers that counts". Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Getting an Accountant or Bookkeeper, Always Needed

If you are inexperienced in financial management, then you should get an accountant initially to help you set up your bookkeeping system, generate financial statements and do some basic financial analysis. But don't count on an accountant to completely take over your responsibility for financial management! The accountant can help you set up a bookkeeping system, generate financial statements and analyze them, but you have to understand financial data to the extent that you can understand the effects of your management decisions, the current condition of your business and how decisions will affect the financial condition of your business in the future.

You should carefully consider whether you should hire an outside accountant, or hire your own employee. The IRS pays increasing attention to the hiring of independent contractors.

Buy a Software Package to Automate Your Financial Management?

Strongly consider getting a software package to manage your books! There are a number of very useful software packages that will help you automate bookkeeping, generation of financial statement and their analysis. Note that an accounting software package can greatly reduce the time to enter and manage accounting transactions, and generate financial statements. However, you still should have at least a basic understanding of the accounting process for your organization, including what journals are used and what general accounts exist. You must have good understanding of financial statements and how to analyze them -- an accounting package cannot do this for you!

Getting a Bank and Banker

You'll need to start a business account at a bank. Probably the best way to find a good bank is to ask for advice and references from other small businesses, especially those that are of the size and nature of yours. If you're just starting out, you probably don't have much money. You may be able to get buy with a non-interest-bearing checking out that has no, or minimal, fees. l

ACTIVITIES IN YEARLY ACCOUNTING CYCLE: Bookkeeping and Controls

Bookkeeping Basics

Basics financial managements starts with good record keeping

Classification of Accounts (for Chart of Accounts)

In accounting, different types of financial transactions (eg, paying telephone bills, copier bills, getting money from sales, getting money from interest income, etc.) are assigned specific numbers (account numbers) which help to record and track those types of transactions. Businesses might create their own list (or chart) of accounts or adopt a chart used by other organizations. In any case, you should have some basic impression of a chart of accounts.

Financial Controls

Financial controls exist to help ensure that financial transactions are recorded and maintained accurately, and that personnel don't unintentionally (or intentionally) corrupt the financial management system. Controls range from very basic (eg, using a checkbook and cash register tapes to more complex, eg, yearly financial audits).

CRITICAL OPERATING ACTIVITIES IN YEARLY ACCOUNTING CYCLE:

Now that you have a basic sense of the overall accounting and financial management process, we'll look at the key parts at the beginning of the overall process, including budgeting, managing cash and credit.

Budget Management

A budget depicts what you expect to spend (expenses) and earn (revenue) over a time period. Amounts are categorized according to the type of business activities, or accounts (for example, telephone costs, sales of catalogs, etc.). Budgets are useful for planning your finances and then tracking if you're operating according to plan. They are also useful for projecting how much money you'll need for a major initiative, for example, buying a facility, hiring a new employee, etc. There are yearly (operating) budgets, project budgets, cash budgets, etc. The overall format of a budget is a record of planned income and planned expenses for a fixed period of time.

Managing Cash Flow

As a new business, your biggest challenge is likely to be managing your cash flow -- probably the most important financial statement for a new business is the cash flow statement. The overall purpose of managing your cash flow is to make sure that you have enough cash to pay current bills. Businesses can manage cash flow by examining a cash flow statement and cash flow projection. Basically, the cash flow statement includes total cash received minus total cash spent. Cash management looks primarily at actual cash transactions.

Managing Your Checking Account

For a new business, your check register very likely will be your primary means to record and track cash. Whether yours is a new business or an established business, you'll need to know how to manage your bank account. See
Reconciling Your Bank Account
Checking Account Lessons
Managing Your Checking Account

Setting Up and Managing Your Bank Account

You will need to set up a business bank account, which will include a business checking account. Banks often classify and handle business bank accounts differently than private or personal bank accounts.

Credit and Collections

One of your biggest challenges in managing cash flow may be decisions about granting credit to customers or clients, and how to collect payment from them.

Budget Deviation Analysis

You learned above that a budget depicts what you expect to spend (expenses) and earn (revenue) over a time period. Budget deviation analysis regularly compares what you expected, or planned, to earn and spend with what you actually spent and earned. The budget deviation analysis can help greatly when detecting how well you're tracking your plans, how much to accurately budget in the future, where there may be upcoming problems in spending, etc. A budget deviation analysis report might include columns with titles:

ACTIVITIES IN YEARLY ACCOUNTING CYCLE: Financial Statements and Analysis

Financial Statements

To really understand the current and future conditions of your business, you have to look at certain financial statements. These statements are generated by organizing and analyzing numbers from your accounting activities. You should understand the two primary financial statements, the Profit and Loss Statement (or Income Statement) and the Balance Sheet. (Some sources believe that there are other primary statements, too, such as the cash flow statement or change in capital, etc. However, the Income Statement and Balance Sheet are the two standard statements for any business.) The following links will give you an overview of these two key statements, and we'll soon get into them in more detail later on below.

Financial Planning and Analysis -- Profit and Loss (Income) Statements

These "P and L" statements depict the status of your overall profits. These statements include much money you've earned (your revenue) and subtract how much you've spent (your expenses), resulting in how much you've made money (your profits) or lost money (your deficits). Basically, the statement includes total sales minus total expenses. It presents the nature of your overall profit and loss over a period of time. Therefore, the Income Statement gives you a sense for how well the business is operating.

Financial Planning and Analysis -- Balance Sheets

Whereas the P and L statement depicts the overall status of your profits (or deficits) by looking at income and expenses over a period of time, the balance sheet depicts the overall status of your finances at a fixed point in time. It totals your all your assets and subtracts all your liabilities to compute your overall net worth (or net loss). This statement are referenced particularly when buying or selling a business, or applying for funding..

Financial Analysis

Financial analysis can tell you a lot about how your business is doing. Without this analysis, you may end up staring at a bunch of numbers on budgets, cash flow projections and profit and loss statements. You should set aside at least a few hours every month to do financial analysis. Analysis includes cash flow analysis and budget deviation analysis mentioned above. Analysis also includes balance sheet analysis and income statement analysis. There are some techniques and tools to help in financial analysis, for example, profit analysis, break-even analysis and ratios analysis that can substantially help to simplify and streamline financial analysis. How you carry out the analysis depends on the nature and needs of you and your business.

Financial Planning and Analysis -- Break-Even Analysis

The break-even analysis uses information from the income statement and cash flow statements to compute how much sales much be accomplished in order to pay for all of your fixed and variable expenses. Fixed expenses are expenses that you'd have regardless of the level of sales of products or services (eg, sales, rent, insurance, maintenance, etc.). Variable expenses are incurred according to the level of sales of products or services (eg, sales commissions, sales tax, freight to ship products, etc.). Break-even analysis can help you when projecting when you'll make a profit, deciding how much to charge for a product, setting a sales goal, etc.

Financial Planning and Analysis -- Ratios

There are a variety of ratios that can be used to help determine the current and future condition of a business. The following links provide explanation and procedures for using those ratios. The ratios are produced from numbers on the financial statements. Note that the usefulness of ratios often are from comparing ratios from different time periods in the same business or from industry standards for a type of business, eg, manufacturing, wholesale, service, etc.

SPECIAL TOPICS

Financing Major Purchases

Cost of Lease vs. Purchase
Leasing Office Space
How to Save for a Major Purchase

GENERAL RESOURCES

Various Types of Resources

Sources of Online Assistance and Information

Resources for For-Profits

Getting and Using Accounting Services
Choosing and Using an Accountant
Ways in Which an Accountant Can Help
Choosing Professionals to Help You
Keeping Accounting Costs Down

Getting and Using Banking Services
Choosing Professionals to Help You
Setting up Your Bank Accounts
Closing a Bank Account Without Going to the Bank

Have a Treasurer to Help You?
Role of Board Treasurer (if your's is a corporation)
Being a Club Treasurer (pertains to club treasurer, but presents many possible tasks)
Treasurer Responsibilities (to help you determine if you need one)

Accounting Software
Software for Small Businesses

Also consider
Getting and Using a Lawyer in the U.S.