4 Ways Tracking Finances Helps Small Businesses Thrive & Your 7-Step Guide

Every business – no matter the size – shares a similar goal: increasing profits while decreasing costs. But how is that possible with all the competing priorities of running a business? Tracking the movement of your monetary funds is never easy, but it’s one important factor that may be holding you back from achieving the progress you’re after! We’ll look at 4 ways tracking finances helps small businesses thrive. 

That’s not even the best part! Stick to the end, and you’ll get a free simplified plan to make tracking your finances for 2023 easier and access to our financial tracking worksheet. Let’s dive right in!

4 Ways To Thrive

1. Increase Profits

You’ve probably learned the basics of how to calculate profit in a business, or you might find yourself quickly googling for a formula! Tracking expenses helps you understand which aspects of your business are eating up the most revenue. While some of those expenses will be necessary, understanding the most costly areas allows you to direct attention toward the areas that lack cash management, are increasing faster than expected, or catch you by surprise.

Once you have a clear understanding of expenses and whether they are one-time or repeated, assessing and reducing unnecessary costs becomes much easier. Managing costs also reduces overall expenses, leading to an increase in general profit.

Similarly, knowing where your revenue comes from allows a better understanding of how you make your money! Comparing your income to expenses allows you to determine the health of a particular product or service and prioritize your areas of focus for future growth.

Assessing profit is one of the fundamental steps to increasing it. Tracking finances helps you understand the essential difference between profit and profitability. 

2. Reduce Unforeseen Risks and Costs

Business projections can help take the success of your business up a notch by:

• Helping to prepare for future needs 
• Foreseeing and/or decreasing long-term costs

Tracking expenses over a period of time allows you to predict upcoming expenses. Knowing your cash usage lets you plan for the months or years to come and determine how you may want to adjust your investments over time. 

Let’s look at an example. After tracking expenses for the year, I categorize each transaction and look at the monthly expenses for that category. This shows how much is spent on things like technology, content development, taxes, fees, etc., and allows me to see trends over time:

• Are my costs in a particular category increasing month over month? 
• Do I have a period of time in the year that is always more expensive with lump sum payments? 
• Are there new expenses to grow the business that I can plan for?
• What risks exist within my categories, and what kind of contingency do I need on hand?

Using past data to predict future expenses provides the insight needed to plan for business needs.  

3. Create Ideal Business Goals 

Do you know how small businesses stay on the road to success? By centering on the goals that keep them focused, motivated, and growth-oriented. But in order to grow profits, you’ve got to balance revenue growth without ballooning your expenses.

To complete your business roadmap, you must target the correct elements and generate the cash flow to support it. A predictive assessment of expected revenue and expenses helps you determine if a product or service should be added to your roadmap. In contrast, ongoing assessments allow you to determine what’s working and what isn’t, possibly deciding to exit a particular portion of your market.

You can manage these assessments with a simple spreadsheet that tracks income and expenses, and allows you to analyze trends over time. From there, you can judge the market and set goals for revenue generation and/or expense cutting measures based on real data insights!

4. Improve Cash Flow Management 

According to the business expert Gary Dunlop, “mismanagement of cash flow” is one of the main reasons many businesses fail. Besides that, it can be a menace for small businesses. 

Cash flow management refers to the overall transfer of money inside a business. If you have a spreadsheet tracking all the cash flowing in and out in the form of income and expenses, that would be your cash flow list. 

Financial tracking provides necessary insight into where your cash actually goes and how much cash you have on hand. Therefore, you’ll be able to plan for and control your overall cash flow.

The 7-Step Plan For Managing & Tracking Finances 

Tracking finances can become difficult if you have an expansive business. However, it isn’t that easy for small businesses either.

To accurately enlist all your revenue and expenses, you must consistently focus on and manage your business’ funds. Here we offer an ideal strategy to help you take control of your business finances with these seven simple steps. 

1. Open a Separate Business Account

As any accountant is likely to tell you, it’s important to keep your business and personal expenses separate. This also simplifies your ability to track cash flow by keeping all business expenses disconnected from non-business expenses. You’ll have less mess and easier financial management.

A separate business account can also help simplify your tax prep and identify potential deductions! Depending on your account, your business may also have access to a line of credit* that can be used to help cover cash flow in a shortfall or make a strategic purchase. 

*It is important to ensure you fully understand how the use of a line of credit works and applies to your specific situation; it is recommended to always consult a finance or other applicable professional.

2. Use a Dedicated Business Credit Card

Similar to building your personal credit history, it’s important to build a credit history for your business. Just like having a business-specific bank account, a business credit card also makes financial management that much easier. 

Additionally, using a credit card is ideal for small businesses starting or wanting to jump up a level. They can be an easy way for the company to make big purchases at the right time. Be sure to understand the rates, rewards, and any other pertinent information as it relates to your account to make the best use of your card without over-leveraging debt.

3. Determine Your Accounting Method

Proper financial management also means determining what accounting method your company will follow. Generally, businesses will choose one of these two procedures for their approach:

• Cash-based accounting
• Accrual accounting

Recommendations from many experts point to using the accrual accounting method as the general principle to follow. Learn more about generally accepted accounting principles, also known as GAAP, work with an accountant, and determine what’s best for your business long term.

We know the importance of accurate financials, so here at Simply Hudson, we choose to work with our trusted accountant for all the advice, support and record-keeping we need!

4. Use an Accounting Program or Excel  

Now that you have a method in mind, it’s time to put tools in place for the task at hand. For the day to day, we use our ready-made Excel template to track all income and expenses, allowing us to quickly reference, categorize and run reports. 

For the ongoing business financials – you know, the exact accounting stuff like a balance sheet, income statement, etc. – we suggest cloud-based accounting and finance programs for the flexibility, ease of use, and shareability with our accounting professionals. While these programs have all the bells and whistles, we’re all about risk management and use our Excel tracker to cross-check the outputs. It’s a great way to catch any discrepancies and ensure accuracy in your books. 

5. Use a Receipt Scanner

Be sure to keep the receipts for any and all business expenses! If you don’t want to keep track of all that paper, make use of a receipt scanner to capture, store and organize your receipts. 

Many accounting software programs can do the receipt scanning task for you using OCR technology, making financial tracking that much easier. Otherwise, there are a number of apps that help you scan and manage those receipts. Find the best method for you to maintain consistency!

Here’s a short guide to using a receipt scanner.

6. Link Your Bank to Your Program

Further simplify things by linking your business accounts with the accounting program you choose. Linking your accounts allows the debits and credits to flow through your accounting system, consolidating all the details in one place for categorization and reporting. 

What makes this even better? You’ll likely be able to manage invoicing and receive payments if you choose a program such as QuickBooks! Choose what methods of payment you accept, set up invoice reminders, and more as it suits your business needs. 

7. Classify And Review

With the list of your incoming and outgoing finances in front of you, review whether everything is in its place. Review how each line item is categorized and edit accordingly. Work with your accountant to determine ownership of the work and agree on categories.

Remember: 82% of failed businesses reported mismanagement of cash flow as a factor in failure.

Ready to Start Tracking Finances to Help Your Small Business?

Tracking finances creates a clear image of cash flows for small businesses. It may seem overwhelming at first, but with discipline and consistency, it will benefit your business in multiple ways. 

Following our 7-step plan will help get you on the path to success. Do you see dollar signs with the growth of your small business? We gave you the plan – it’s up to you to get started! 

Get the Simply Hudson Financial Tracker today to get started on tracking your finances!

The information contained in this publication and any accompanying resources are not intended as, and shall not be understood or construed as, legal, accounting or other financial advice. Simply Hudson is not an attorney, accountant or financial advisor and the information contained herein does not substitute for the financial advice or otherwise provided by a professional who is aware of your individual circumstances. Simply Hudson recommends you seek advice from a professional to suit your particular circumstances.