Financial reports, also called financial statements, demonstrate a company's financial position over a specific period of time. Most businesses and organizations provide financial reports to their Boards of Directors, shareholders and investors on a monthly, quarterly or annual basis. They are reviewed to identify trends, successes and problems within a company's finances. These reports are often prepared by accountants or financial teams, but they are not complicated to read. Read a financial report by paying attention to the balance sheet, income and cash flow.
Steps.
1. Identify the time period covered by the financial report. Usually, the top of the report or statement lists the time period.
2. Look at the balance sheet. The balance sheet lists the assets and liabilities of the company.
Take a look at how the balance sheet is set up. In some reports the assets will be listed on the right, and the liabilities on the left on other reports the assets will be listed first and on top, and the liabilities below after the assets.
Read the assets. Assets include cash, investments, property and other things owned by the company that have value. The assets are listed in order of liquidity. The most liquid assets, such as cash, are presented first.
Review the liabilities. Liabilities are debts or obligations that the company owes to others. These include rent, payroll, taxes, loan payments and money owed to other vendors or contractors.The liabilities and equity section are combined to produce a balance with the asset component. The equity section gives a break down of the value of money invested and re-invested in the business.
Notice the difference between current liabilities and long term liabilities. Current liabilities are things that need to be paid off within a year. Long term liabilities will take more than a year.
A balance sheet must always balance that is, the sum of assets must be equal to the sum of liabilities and equities. If that is not the case, it is usually the first sign of a badly reported financial Statement.
3. Look at the income statement. This will show you how much money the company earned over the specified period of time. Any money that was spent in earning that income will also be reflected.
Read the top line, which should say "sales" or "gross revenue." This reflects the amount of money the company made by providing its products or services, before any expenses are deducted.
Look at the cost of goods sold. This is the negative figure directly below the revenue/ sales figure. This figure represents the direct expenses incurred by the business in making the revenue/ sales figure.
The Gross profit which is the difference between the sales/revenue figure and the cost of goods sold represents the profit made by the business before operational expenses are deducted. This figure is always a positive number, if it is negative, it means the business is not viable.
Review the operating expenses. These include the costs of doing business, such as salaries, advertising, salaries and miscellaneous expenses.
Notice the depreciation line. This reflects the cost of an asset over the amount of time it can be used by the company.
Check the operating profit, which is the amount of money the company made after the operating expenses are deducted, the operating profit is the Gross profit figure less the total operating expenses figure.
Look at the amount of interest that was earned and paid. These are called Finance costs if interests are paid or Finance income if interests are earned. A business inures finance costs when it has borrowed money at an interest like wise a business earns Finance/ Interest income when it has lent money at an interest or invested in money market securities. .
Check the amount of income tax that was subtracted.
Read the last line of the income statement. This reflects the net profit or loss.
4. Look at the cash flow statement. This will tell you how much cash the company has available. It will also track the money coming in and out of the company during the specified time.
Read about the operating activities first. This section analyzes how the company's cash was used in order to reach its net profit or loss.
Check the investment activities. This part of the cash flow statement shows any income from investments or assets that were sold.
Look at the financing activities. This tracks what the company did to pay back or acquire things such as bank loans.
5. Review any narratives. Accounting professionals will often provide a paragraph that provides an overview of the financial report.
6. Look through supporting documentation if you have questions. There are usually back-up or supporting documents available, such as receipts and invoices, that help explain transactions.
Tips,
Remember that all of your financial reports will be included in audits and tax preparations. Ask your accountants if you have any questions or feel unsure about what you are reading.
Schedule an independent audit at least 1 time per year in order to make sure your financial reports and statements are consistent and accurate.
Whether you’re planning to expand an existing business or just now getting one off the ground, a small business loan can give you the financial support you need. Not all businesses can get a small business loan, so you need to take special care when applying for one. Make sure your credit history is as strong as possible, and search for lenders. Lenders will want to see numerous financial documents, so gather them ahead of time. Although getting a small business loan takes a lot of work, it is possible.
Part 1 Improving Your Credit Profile.
1. Pull your personal credit score. Most lenders will look at your personal credit history, even when you apply for a business loan. For this reason, obtain your credit score and check whether it’s high enough to qualify for the best interest rates. Generally, you’ll need a score above 680. You can get your credit score in the following ways:
Check your credit card statement. Many credit card companies now give their customers their FICO score.
Buy your FICO score for $20 at myfico.com.
Use a free website, such as CreditKarma.com or Credit Sesame.com.
2. Obtain a copy of your personal credit report. Errors on your credit report can pull down your credit score. In the U.S., you can get a free copy of your credit report each year from the three major Credit Reporting Agencies (CRAs). Don’t contact the CRA’s individually. Instead, visit annualcreditreport.com or call 1-877-322-8228. All three credit reports will be sent to you.
3. Remove inaccurate information from your credit report. Highlight any errors and contact the CRA that has the wrong information. Common errors include accounts listed that don’t belong to you or accounts inaccurately listed as in default.
You can contact the CRA directly through its website. If the inaccurate information appears on more than one credit report, you only need to contact one CRA, which will alert the other two.
It can take up to 60 days to remove inaccurate information.
4. Improve your credit score. Paying down your balances is the fastest way to improve your credit score. Tackle high-interest debts first, such as credit card debts. Send every monthly payment on time and pay at least the minimum. You should see a slow but steady improvement in your credit score.
Avoid taking out a new credit card, which will temporarily hurt your score. Instead, you can ask for an increase in the credit limit on one or more cards.
Unfortunately, there’s no quick fix for improving your credit score, and you should avoid any company promising to improve your score fast. These companies are often scammers.
5. Build your business credit. Lenders will also look at your business credit profile. Start building your business credit history by obtaining a D-U-N-S number from Dun & Bradstreet. You can get it for free by registering at their website.
Your creditors should report your payment history to Dun & Bradstreet. If not, list them as trade references. Dun & Bradstreet will then follow up and collect payment information.
Your business credit report will contain information about court judgments or liens against your business. You can boost your business credit by paying off any liens and judgments.
Part 2 Identifying Loans and Potential Lenders.
1. Determine the type of loan you need. There are several types of business loans you can get. You should identify the type you need before talking to a lender. Consider the following options.
Line of credit. You can draw from a credit line whenever you’re short of cash. For example, you might need money to make payroll or pay a vendor. You then pay back what you drew on your credit line. A line of credit is a lot like a credit card.
Installment loan. You can get an installment loan to expand operations. You pay it back in equal monthly installments over one to seven years.
Equipment loan. You get a loan to buy equipment, and the lender takes a security interest in the equipment until the loan is paid back. If you default on your loan, the lender seizes the equipment.
2. Stop into banks. Some banks are hesitant to lend to small businesses, but you still should stop in and talk to a loan officer. Discuss your business and ask for the bank’s requirements. You should stop in at least a month before you intend to apply.
Visit banks you’ve done business with as well as banks with whom you have no prior relationship. However, local community banks are more likely to lend to a small business than a large national bank.
3. Check with credit unions. Credit unions have increased the number of business loans they make, so they are a good option for small business owners. You’ll need to become a member of the credit union before you can apply for a business loan, but setting up an account shouldn’t be too burdensome. Credit unions typically offer better rates and lower fees than traditional banks.
4. Research online lenders. Online lending has exploded over the past few years and is a good option if your credit isn’t perfect. You can find online lenders at different aggregator sites, such as LendingTree and Fundera.
There are many online scammers, so thoroughly research online lenders. Look up the business with the Better Business Bureau and Google the company to check for complaints. Only do business with an online lender that has a street address.
5. Research government-backed loans. In many jurisdictions, the government will guarantee loans. This means they agree to pay back a certain percentage of the loan if the borrower defaults. Because of this guarantee, you generally get more favorable interest rates and repayment terms.
In the U.S., the Small Business Administration (SBA) guarantees small business loans. It’s most popular loan program is the 7(a) program which guarantees up to $5 million in loans. 7(a) loans can be used to build a new business or expand an existing one.
Even though the SBA guarantees the loan, you still apply with a bank. Talk to the bank about whether it is experienced with SBA loans and ask if it is part of the SBA Preferred Lender Program (PLP).
6. Ask friends or family for a loan. The people who know you the best might be willing to loan your business money. Approach your friends and family in the same manner you would a bank. Provide them with a copy of your business plan and your financial documents.
You can agree to pay interest, which will show that you are serious about repaying the loan. In the U.S., the interest rate shouldn’t be higher than the maximum allowed in your state, but it should be at least the federal funds rate, which you can find at the IRS website.
Also draft a promissory note and sign it, which will make the loan official.
Part 3 Gathering Required Information.
1. Create a personal financial statement. Every owner who owns at least 20% of your business should create a personal financial statement. Financial statements contain information about your assets, such as cash, mutual funds, certificates of deposits, and real estate. They also identify all liabilities owed to lenders, creditors, and the government.
2. Pull together business financial documents. Lenders will want to see your business balance sheet, profit and loss statement, and cash flow statement. If you need help creating these documents, consult with an account.
Ideally, your financial statements should be audited by a certified public accountant. Ask another business owner if they would recommend their CPA, or contact your nearest accounting society to obtain a referral.
3. Collect other required information. Lenders want a complete picture of your business, so they will require plenty of paperwork. Gather this ahead of time so that the application process goes smoothly. Get the following.
Personal tax returns for the past three years.
Recent personal bank statements.
Business tax returns for the past three years.
Recent business bank statements.
Resumes for each owner and member of management.
Business leases.
Articles of Organization (if an LLC) or Incorporation (if a corporation).
Franchise agreement (if applicable).
4. Show you have the necessary down payment. Generally, you need a cash down payment of 20%. If you hope to borrow $100,000, then you should have $20,000 in cash. Make sure that you have bank records showing the necessary down payment.
5. Draft a business plan. Your business plan lays out where your business is headed in the next few years and how you plan to get there. Lenders want to see a solid business plan before they will make a loan. Your business plan should identify your target market, marketing plan, management, and financial projections.
Some lenders want your business plan to contain specific information. Stop into the bank before applying and ask about their specific requirements.
Business plans can be hard to write. In the U.S., you can get help at your nearest Small Business Development Center, which you can find at https://www.sba.gov/tools/local-assistance/sbdc.
6. Document any collateral. Some lenders won’t give you a loan unless you pledge assets as collateral. Collateral protects lenders since they can seize the assets if you default on your loan. Common forms of collateral include inventory, heavy equipment, accounts receivables, and your home.
You should document the location and condition of the collateral. If possible, hire an appraiser to value the collateral.
Part 4 Applying for Your Loan.
1. Fill out your application. Each lender’s application will be slightly different. However, most will ask your reasons for applying for the loan, as well as the identity of your management team. Also identify any suppliers you will be buying assets from.
Each lender will pull your credit report, which will ding your credit score. However, all credit pulls in a two-week window will count as a single pull, so plan accordingly.
2. Wait to hear back. You should hear back within two to four weeks. If you want, you can call once a week and ask for an update on your application status. The lender might need more documentation, so provide it as quickly as possible.
About 80% of applicants for small business loans are rejected, so don’t be surprised if you get turned down. Ask any lender who rejects you to explain why. For example, you might need to save a larger down payment or draft a better business plan.
If no lender will give you a loan, consider other forms of funding, such as getting a business credit card.
3. Review the loan terms. Any lender that approves you should provide a term sheet which contains the details of the loan—the loan period, the annual percentage rate, and fees. Make sure you are comfortable with the terms.
You probably will need to personally guarantee the loan. This means that if you stop making payments, the lender can come after your personal assets, such as your car or home.
4. Close on the loan. Sign the term sheet or commitment letter and return it to the lender. The lender will then schedule a closing, which usually happens 45-60 days later. If your loan is guaranteed by the SBA, you’ll work with the loan officer to gather the necessary documents to submit. At the closing, you will review and sign a variety of documents before receiving your loan proceeds.
FAQ.
Question : Where can I find investors for small business?
Answer : If you're in the U.S., contact your nearest Chamber of Commerce or Small Business Development Center. They might know of local investors who are interested in small businesses.
Question : Are there any charities the will help me start a business?
Answer : You should start looking into crowdfunding websites. If people like your product or service, they'll donate money. Sometimes you can give the donators your product/service at a discounted price as an incentive.
Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.
Method 1 Arranging for a Loan.
1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.
Equity capital is the current market value of everything the company owns less any liabilities owed by the company.
Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.
2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.
To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.
Annual reviews are required to maintain your line of credit.
3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.
Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.
Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.
Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.
Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.
4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.
Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.
5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.
SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.
SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.
Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.
Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.
Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).
6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.
Each agency has its own application process. However many require the same basic documentation. Gather the following information.
A loan application form that details why you are applying for the loan and how you will use the money.
Your resume gives lenders information about your expertise in the field.
All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.
Your business credit report gives lenders information about your credit worthiness.
Be prepared to submit your business and personal tax returns for the past three years.
Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.
Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.
You may need to put up collateral, especially if you cannot provide strong financial statements.
Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.
7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.
Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.
Method 2 Applying for Grants.
1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.
2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.
SBA grants for non-profits are announced on grants.gov.
Businesses qualifying for specific initiative grants authorized by Congress will be notified.
U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.
3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.
4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.
Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.
Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.
Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.
Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.
Method 3 Finding Investors.
1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.
2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.
Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.
Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).
3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.
According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).
Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.
Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.
Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.
4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.
If you funded your business through startup or small-business loans, the lender may require you to file a UCC financing statement. These documents are filed when you secure the loan with personal or business assets, and create a lien on those assets. While the UCC financing statement doesn't necessarily impact your day-to-day business, it may affect your ability to get additional funding.
Part 1 Completing the Form.
1. Download the UCC-1 form. A PDF version of the UCC-1 form typically is available on the website of the state's Secretary of State office. Download the form for your state. Although these forms are for the most part universal, some states have additional fields or requirements.
The state form's instructions also tell you what the filing fees are, which vary among states.
To find the correct website, do an internet search for "secretary of state" with the name of your state.
2. Provide direct contact information if desired. The first part of the form allows you to provide a phone number, email address, and mailing address if you want to make it easier to be contacted. These fields are optional.
Once filed, the form is a public record, so be careful about the identifying information you include.
3. Fill in the debtor's name and mailing address. The debtor is the person who took out the loan. It may be an individual, or it may be in the name of a business or organization. If the loan is in the name of the business, include the business mailing address.
There is space for additional debtors. Include them exactly as they appeared on the loan agreement. If there are additional named debtors that won't fit on the main form, you can file an addendum to include them.
4. List the name and address of the secured party. The secured party is the lender who made the secured loan. Usually this will be the name of the bank or lending company. Check to find out what address they prefer to be listed on UCC financing forms – don't just list the name of your local branch, for example.
5. Indicate the collateral covered by the financing statement. Following the name and address of the secured party, there is space to identify the collateral that secures the loan. Be as specific as possible.
For example, if the loan is secured by real property, provide the legal description of the property that is listed on the property's deed.
If you need additional space for collateral, you can fill out an addendum.
6. Include applicable descriptions of the transaction. At the bottom of the UCC form, there are several boxes you can check if any of them apply to the particular transaction. If nothing suits the loan covered by the statement, you can leave this section blank.
7. Fill out an addendum if necessary. If there was extra information that wouldn't fit on the original form, you can include it on an addendum. This form is also available from the website of the state's secretary of state, and may be included with the main UCC financing statement form.
Some states require additional information for specific loans or transactions. If so, you'll enter this information on the addendum as well.
Part 2 Recording the Form.
1. Identify the proper location to file the statement. UCC financing statements are filed based on the residence of an individual debtor, or the location of the main offices of a business debtor. Usually the form is filed with the state's UCC office.
If real property is used as collateral, you may also need to file a copy of the UCC financing statement with the register of deeds in the county where that property is located.
2. Complete an Information Form if you want copies. While you may receive an acknowledgement copy when your statement is recorded, the information form allows you to order additional copies of the official recorded statement.
For example, if there are multiple debtors, you may want to order a copy for each debtor's records.
You can download an information form from the website of the state's secretary of state.
3. Submit form and fees online if possible. It's usually easier to file your UCC financing statement online with the UCC office, and often the fees are lower than if you file print forms. Check on the website of the state's secretary of state office to see if this option is available.
If the loan is secured with real property, you may still need to file a paper copy with the register of deeds for the county where the property is located.
4. Mail your financing statement with filing fee. If you don't want to file online, or if that option isn't available, you can mail paper copies to the state's UCC office. You may want to check for acceptable methods of payment. Typically you can pay by check or money order.
The filing fees are minimal, typically less than $20. Some states may charge a per-page fee if you file a paper statement.
5. Receive your acknowledgement letter. When your financing statement is recorded by the state's UCC office, you'll receive a letter in the mail along with an acknowledged copy of the official statement.
Keep these documents for your records. You may want to file them along with the documents related to the loan they cover.
Effective and efficient management of finances is critical to the growth and success of any small business. The easiest way to do this is to hire a dedicated accountant or bookkeeper right away. If you don't have the resources to hire a professional, take advantage of bookkeeping and other financial software to track your cash flow and generate reports. That way you can stay on top of your profits and act quickly to minimize losses.
Method 1 Taking Payments and Paying Expenses.
1. Create a budget and review it regularly. A budget is essential if you want your business to be profitable. Categorize your business's regular expenses to determine how much income your business needs to generate.
Creating multiple budgets can be helpful. For example, you may want to create one with a bare minimum of sales, so you know how to allocate the money when there isn't much coming in.
Use your budget to plan for the growth of your business, such as hiring a new employee or expanding your advertising and marketing.
2. Open a separate business bank account. Even if you're running your business as a sole proprietorship, you still want to keep your business finances separate from your personal finances. Mixing your assets together can cause problems if you're audited, or sued by a business creditor.
Don't take money from your business bank account to pay for personal expenses. If you need money from the business, label it appropriately as a draw from the business and transfer the money to your personal bank account first.
3. Decide what types of payment you'll accept. Having a variety of payment options is a convenience for your customers. Each method of payment has its own costs and risks that you'll want to take into account.
Cash is the simplest method of payment, but presents security risks. If you're going to take cash, have a secure safe and plan on making regular bank deposits.
If you want to take credit or debit cards, look into the different services to find the one that best suits your needs and your overall budget. You typically have to pay a subscription fee for the service, plus a fee per transaction. You may want to require a minimum purchase amount for credit or debit cards.
4. Standardize payment terms. You should have a policy in place that establishes rules for payment of your products or services. Apply those rules to all customers, rather than creating payment terms for individual clients on a piecemeal basis.
Universal payment terms will make your bookkeeping easier, and can smooth your collections process. If you apply the same terms across the board, you also don't have to worry about remembering the arrangements you made with each individual customer.
Method 2 Tracking Overall Cash Flow.
1. Choose your accounting method. To manage your business finances, you must choose either the cash or accrual accounting method and use it consistently. With the cash method, you record sales and expenses when money actually changes hands. For the accrual method, on the other hand, you record sales and expenses when they take place, rather than when money changes hands.
For example, suppose you are a construction contractor and you receive an invoice. If you were using the cash method, you would record the expense in your books when you actually paid the invoice. However, if you were using the accrual method you would record it the day you received it, even if you didn't pay it for several days or weeks.
Cash accounting works better if you have a small business that deals primarily with point-of-sale transactions. If you deal with larger contracts that aren't paid all at once, the accrual method may be a better option for you.
2. Record all sales and expenses. Set up a system so that all sales and expenses are put on the books the day they occur, following the accounting method you've chosen. Only doing the books on a monthly or quarterly basis may result in errors.
If you have a store, you can use a point of sale system to track sales and produce reports that you can easily use to reconcile your books each day.
When you have employees or other partners buying things for the business, make sure you get those receipts as soon as possible so you can keep your books up to date.
3. Purchase bookkeeping software. There are a number of bookkeeping programs, such as QuickBooks, that you can purchase and use to manage your business finances. Most of these programs are arranged so that you pay a monthly subscription fee to use the service.
When you use a subscription, software-as-a-service platform, your data is stored in the cloud so that you don't have to worry as much about security or data loss.
These programs can be connected to your business bank accounts, credit cards, and other systems so that much of the information is entered into your books automatically.
4. Hire an accountant if you need help. If you don't have accounting and bookkeeping education and experience, you may want to hire someone who does. Particularly if you've borrowed money to start up your business, a professional can help you avoid potentially costly mistakes.
Check with the local licensing or regulatory authority to make sure any financial professional you want to hire has all the necessary education and certifications, and that their licenses are active and free of any disciplinary actions.
If you can't afford to have someone working for your business full-time, you may be able to consult with an accountant periodically, or use a bookkeeper occasionally to go over your books and correct any errors.
Method 3 Generating Financial Reports.
1. Download bookkeeping software to simplify report creation. When you use bookkeeping software, you also have the ability to generate the financial reports you need with the click of a button. However, the reports created are only as good as the information you put into the software.
Go over your sales and expenses before you generate your final reports. Reconcile your books with your receipts and bank account statements to make sure the information is correct.
Once you're satisfied with the information, click through to create your reports. You'll typically be prompted to enter the dates you want the report to cover, and the specific information you want included.
2. Create quarterly profit and loss (P&L) reports. Your P&L reports are among the most important tools for assessing and growing your business. Many bookkeeping programs will generate these reports for you if you input the parameters of the report you want.
Your P&L starts with your total sales. You then subtract from those sales the cost of the products or services sold to get your gross profit.
Take your gross profit and subtract other expenses, such as rent or utilities, from that number. You'll be left with your net profit for the time period.
P&L reports are especially important if you anticipate needing small business loans or other outside funding.
3. Prepare quarterly business financial statements. In addition to your P&L, there are several other statements, such as your cash flow statement and your balance sheet, that help you determine where money is flowing in and out of your business.
Your cash flow statement reports the increase or decrease of money flowing into your business. You can quickly see the amount of cash on hand and what you did with it, as well as where that money came from (whether from sales or other sources, such as a loan).
The balance sheet summarizes your business's assets and liabilities. It will be particularly helpful if you have a business credit card, or if you've taken out a small business loan to help fund the start up of your business.
4. Update your projections based on your actual cash flow. Your business plan likely includes cash flow and profit projections several years into the future. As you operate your business, you'll want to check periodically and make sure these projections are still accurate given your business's actual performance.
Look at your business plan and update it twice a year. You also want to update it any time you're applying for a small business loan or courting investors, so they have the most up-to-date information to make their decision.
Depending on how your actual performance compares to your initial expectations, you also may want to adjust some of your business goals and plans for growth or expansion.
Method 4 Filing Business Taxes.
1. Get a separate tax ID number for your business. Even if you're running your business as a sole proprietorship, a separate tax ID number for your business will help keep your business and personal finances separate.
If you have a US business, you can get an employer identification number (EIN) easily online at the IRS's website. Simply go to https://sa.www4.irs.gov/modiein/individual/index.jsp and begin your application.
In other countries, consult a tax professional or business attorney to find out what you need to do to correctly document your business for tax purposes.
2. Choose your tax year. For tax purposes, you can use the calendar year, or any 12-month period that starts on a specific date. In most cases, it's easiest to use the calendar year. When you choose your tax year, you have to use it consistently as long as you remain in business. Typically, you can't change it later.
Most businesses use the calendar year as their tax year. If you're thinking about using a different 12-month period, you may want to consult an attorney or tax professional first.
3. Maintain records of deductible expenses. When you run your own business, you have the ability to deduct many of your business-related expenses on your taxes. These deductions lower your profits and decrease your business's tax liability.
Generally, anything you buy to conduct business will be at least partially deductible. The expense must be reasonable. If you're unsure about something, save the receipts and discuss it with a qualified tax professional.
Expenses such as rent and utilities for commercial space, computers, and office supplies are examples of business expenses that typically are deductible.
4. Use depreciation for more costly assets and fixtures. If you buy something to use in your business that you anticipate using for many years, you typically can't deduct the entire cost at once. Rather, you deduct a portion of it for several years.
The amount and length of time you can claim depreciation depends on how the expense is categorized and the length of its useful life. These are defined by the government.
If you have a significant amount of purchases that are subject to depreciation, it's a good idea to have a tax professional do your taxes so you can make sure you're depreciating them using the right method and getting the maximum possible deduction.
5. Check tax and licensing obligations with your state or local government. State and local governments also may tax businesses, or require you to maintain certifications or licenses if you want to operate your business.
Your local small business association or chamber of commerce typically will have information on the licenses required to operate a small business in your area.
Visit the website of your state or local government tax authority to find out what taxes you must pay as a business owner. For example, if you have employees you typically are required to pay for worker's compensation insurance.
6. Set up the correct withholding for any employees. If you hire regular employees and pay them salary or hourly wages, you must withhold federal taxes and Social Security from their paychecks. You also may need to withhold for state taxes.
Many small businesses contract with a payroll service to take care of their withholding and the issuing of paychecks for them. Talk to business owners in your area to find out how they handle payroll.
7. Pay quarterly estimated taxes. As a business owner, you typically must pay taxes on a quarterly basis and then reconcile on the business tax return at the end of the year. Your state may have estimated tax filing requirements as well.
Depending on the nature of your business, you also may have to collect state or local sales tax for all purchases.
8. Use a tax preparation service to simplify the process. Many companies that offer bookkeeping services also have tax preparation services. Connecting the accounts together can save you a lot of hassle because they will automatically categorize your deductions and estimate quarterly tax payments for you.
As with bookkeeping services, tax preparation services are only as good as the information you put into them. If you're unsure about whether something qualifies as a deduction, talk to a qualified tax professional.
If you funded your business through startup or small-business loans, the lender may require you to file a UCC financing statement. These documents are filed when you secure the loan with personal or business assets, and create a lien on those assets. While the UCC financing statement doesn't necessarily impact your day-to-day business, it may affect your ability to get additional funding.
Part 1 Completing the Form.
1. Download the UCC-1 form. A PDF version of the UCC-1 form typically is available on the website of the state's Secretary of State office. Download the form for your state. Although these forms are for the most part universal, some states have additional fields or requirements.
The state form's instructions also tell you what the filing fees are, which vary among states.
To find the correct website, do an internet search for "secretary of state" with the name of your state.
2. Provide direct contact information if desired. The first part of the form allows you to provide a phone number, email address, and mailing address if you want to make it easier to be contacted. These fields are optional.
Once filed, the form is a public record, so be careful about the identifying information you include.
3. Fill in the debtor's name and mailing address. The debtor is the person who took out the loan. It may be an individual, or it may be in the name of a business or organization. If the loan is in the name of the business, include the business mailing address.
There is space for additional debtors. Include them exactly as they appeared on the loan agreement. If there are additional named debtors that won't fit on the main form, you can file an addendum to include them.
4. List the name and address of the secured party. The secured party is the lender who made the secured loan. Usually this will be the name of the bank or lending company. Check to find out what address they prefer to be listed on UCC financing forms – don't just list the name of your local branch, for example.
5. Indicate the collateral covered by the financing statement. Following the name and address of the secured party, there is space to identify the collateral that secures the loan. Be as specific as possible.
For example, if the loan is secured by real property, provide the legal description of the property that is listed on the property's deed.
If you need additional space for collateral, you can fill out an addendum.
6. Include applicable descriptions of the transaction. At the bottom of the UCC form, there are several boxes you can check if any of them apply to the particular transaction. If nothing suits the loan covered by the statement, you can leave this section blank.
7. Fill out an addendum if necessary. If there was extra information that wouldn't fit on the original form, you can include it on an addendum. This form is also available from the website of the state's secretary of state, and may be included with the main UCC financing statement form.
Some states require additional information for specific loans or transactions. If so, you'll enter this information on the addendum as well.
Part 2 Recording the Form.
1. Identify the proper location to file the statement. UCC financing statements are filed based on the residence of an individual debtor, or the location of the main offices of a business debtor. Usually the form is filed with the state's UCC office.
If real property is used as collateral, you may also need to file a copy of the UCC financing statement with the register of deeds in the county where that property is located.
2. Complete an Information Form if you want copies. While you may receive an acknowledgement copy when your statement is recorded, the information form allows you to order additional copies of the official recorded statement.
For example, if there are multiple debtors, you may want to order a copy for each debtor's records.
You can download an information form from the website of the state's secretary of state.
3. Submit form and fees online if possible. It's usually easier to file your UCC financing statement online with the UCC office, and often the fees are lower than if you file print forms. Check on the website of the state's secretary of state office to see if this option is available.
If the loan is secured with real property, you may still need to file a paper copy with the register of deeds for the county where the property is located.
4. Mail your financing statement with filing fee. If you don't want to file online, or if that option isn't available, you can mail paper copies to the state's UCC office. You may want to check for acceptable methods of payment. Typically you can pay by check or money order.
The filing fees are minimal, typically less than $20. Some states may charge a per-page fee if you file a paper statement.
5. Receive your acknowledgement letter. When your financing statement is recorded by the state's UCC office, you'll receive a letter in the mail along with an acknowledged copy of the official statement.
Keep these documents for your records. You may want to file them along with the documents related to the loan they cover.
Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.
Method 1 Arranging for a Loan.
1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.
Equity capital is the current market value of everything the company owns less any liabilities owed by the company.
Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.
2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.
To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.
Annual reviews are required to maintain your line of credit.
3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.
Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.
Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.
Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.
Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.
4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.
Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.
5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.
SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.
SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.
Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.
Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.
Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).
6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.
Each agency has its own application process. However many require the same basic documentation. Gather the following information.
A loan application form that details why you are applying for the loan and how you will use the money.
Your resume gives lenders information about your expertise in the field.
All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.
Your business credit report gives lenders information about your credit worthiness.
Be prepared to submit your business and personal tax returns for the past three years.
Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.
Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.
You may need to put up collateral, especially if you cannot provide strong financial statements.
Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.
7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.
Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.
Method 2 Applying for Grants.
1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.
2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.
SBA grants for non-profits are announced on grants.gov.
Businesses qualifying for specific initiative grants authorized by Congress will be notified.
U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.
3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.
4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.
Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.
Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.
Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.
Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.
Method 3 Finding Investors.
1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.
2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.
Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.
Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).
3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.
According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).
Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.
Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.
Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.
4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.
Effective and efficient management of finances is critical to the growth and success of any small business. The easiest way to do this is to hire a dedicated accountant or bookkeeper right away. If you don't have the resources to hire a professional, take advantage of bookkeeping and other financial software to track your cash flow and generate reports. That way you can stay on top of your profits and act quickly to minimize losses.
Method 1 Taking Payments and Paying Expenses.
1. Create a budget and review it regularly. A budget is essential if you want your business to be profitable. Categorize your business's regular expenses to determine how much income your business needs to generate.
Creating multiple budgets can be helpful. For example, you may want to create one with a bare minimum of sales, so you know how to allocate the money when there isn't much coming in.
Use your budget to plan for the growth of your business, such as hiring a new employee or expanding your advertising and marketing.
2. Open a separate business bank account. Even if you're running your business as a sole proprietorship, you still want to keep your business finances separate from your personal finances. Mixing your assets together can cause problems if you're audited, or sued by a business creditor.
Don't take money from your business bank account to pay for personal expenses. If you need money from the business, label it appropriately as a draw from the business and transfer the money to your personal bank account first.
3. Decide what types of payment you'll accept. Having a variety of payment options is a convenience for your customers. Each method of payment has its own costs and risks that you'll want to take into account.
Cash is the simplest method of payment, but presents security risks. If you're going to take cash, have a secure safe and plan on making regular bank deposits.
If you want to take credit or debit cards, look into the different services to find the one that best suits your needs and your overall budget. You typically have to pay a subscription fee for the service, plus a fee per transaction. You may want to require a minimum purchase amount for credit or debit cards.
4. Standardize payment terms. You should have a policy in place that establishes rules for payment of your products or services. Apply those rules to all customers, rather than creating payment terms for individual clients on a piecemeal basis.
Universal payment terms will make your bookkeeping easier, and can smooth your collections process. If you apply the same terms across the board, you also don't have to worry about remembering the arrangements you made with each individual customer.
Method 2 Tracking Overall Cash Flow.
1. Choose your accounting method. To manage your business finances, you must choose either the cash or accrual accounting method and use it consistently. With the cash method, you record sales and expenses when money actually changes hands. For the accrual method, on the other hand, you record sales and expenses when they take place, rather than when money changes hands.
For example, suppose you are a construction contractor and you receive an invoice. If you were using the cash method, you would record the expense in your books when you actually paid the invoice. However, if you were using the accrual method you would record it the day you received it, even if you didn't pay it for several days or weeks.
Cash accounting works better if you have a small business that deals primarily with point-of-sale transactions. If you deal with larger contracts that aren't paid all at once, the accrual method may be a better option for you.
2. Record all sales and expenses. Set up a system so that all sales and expenses are put on the books the day they occur, following the accounting method you've chosen. Only doing the books on a monthly or quarterly basis may result in errors.
If you have a store, you can use a point of sale system to track sales and produce reports that you can easily use to reconcile your books each day.
When you have employees or other partners buying things for the business, make sure you get those receipts as soon as possible so you can keep your books up to date.
3. Purchase bookkeeping software. There are a number of bookkeeping programs, such as QuickBooks, that you can purchase and use to manage your business finances. Most of these programs are arranged so that you pay a monthly subscription fee to use the service.
When you use a subscription, software-as-a-service platform, your data is stored in the cloud so that you don't have to worry as much about security or data loss.
These programs can be connected to your business bank accounts, credit cards, and other systems so that much of the information is entered into your books automatically.
4. Hire an accountant if you need help. If you don't have accounting and bookkeeping education and experience, you may want to hire someone who does. Particularly if you've borrowed money to start up your business, a professional can help you avoid potentially costly mistakes.
Check with the local licensing or regulatory authority to make sure any financial professional you want to hire has all the necessary education and certifications, and that their licenses are active and free of any disciplinary actions.
If you can't afford to have someone working for your business full-time, you may be able to consult with an accountant periodically, or use a bookkeeper occasionally to go over your books and correct any errors.
Method 3 Generating Financial Reports.
1. Download bookkeeping software to simplify report creation. When you use bookkeeping software, you also have the ability to generate the financial reports you need with the click of a button. However, the reports created are only as good as the information you put into the software.
Go over your sales and expenses before you generate your final reports. Reconcile your books with your receipts and bank account statements to make sure the information is correct.
Once you're satisfied with the information, click through to create your reports. You'll typically be prompted to enter the dates you want the report to cover, and the specific information you want included.
2. Create quarterly profit and loss (P&L) reports. Your P&L reports are among the most important tools for assessing and growing your business. Many bookkeeping programs will generate these reports for you if you input the parameters of the report you want.
Your P&L starts with your total sales. You then subtract from those sales the cost of the products or services sold to get your gross profit.
Take your gross profit and subtract other expenses, such as rent or utilities, from that number. You'll be left with your net profit for the time period.
P&L reports are especially important if you anticipate needing small business loans or other outside funding.
3. Prepare quarterly business financial statements. In addition to your P&L, there are several other statements, such as your cash flow statement and your balance sheet, that help you determine where money is flowing in and out of your business.
Your cash flow statement reports the increase or decrease of money flowing into your business. You can quickly see the amount of cash on hand and what you did with it, as well as where that money came from (whether from sales or other sources, such as a loan).
The balance sheet summarizes your business's assets and liabilities. It will be particularly helpful if you have a business credit card, or if you've taken out a small business loan to help fund the start up of your business.
4. Update your projections based on your actual cash flow. Your business plan likely includes cash flow and profit projections several years into the future. As you operate your business, you'll want to check periodically and make sure these projections are still accurate given your business's actual performance.
Look at your business plan and update it twice a year. You also want to update it any time you're applying for a small business loan or courting investors, so they have the most up-to-date information to make their decision.
Depending on how your actual performance compares to your initial expectations, you also may want to adjust some of your business goals and plans for growth or expansion.
Method 4 Filing Business Taxes.
1. Get a separate tax ID number for your business. Even if you're running your business as a sole proprietorship, a separate tax ID number for your business will help keep your business and personal finances separate.
If you have a US business, you can get an employer identification number (EIN) easily online at the IRS's website. Simply go to https://sa.www4.irs.gov/modiein/individual/index.jsp and begin your application.
In other countries, consult a tax professional or business attorney to find out what you need to do to correctly document your business for tax purposes.
2. Choose your tax year. For tax purposes, you can use the calendar year, or any 12-month period that starts on a specific date. In most cases, it's easiest to use the calendar year. When you choose your tax year, you have to use it consistently as long as you remain in business. Typically, you can't change it later.
Most businesses use the calendar year as their tax year. If you're thinking about using a different 12-month period, you may want to consult an attorney or tax professional first.
3. Maintain records of deductible expenses. When you run your own business, you have the ability to deduct many of your business-related expenses on your taxes. These deductions lower your profits and decrease your business's tax liability.
Generally, anything you buy to conduct business will be at least partially deductible. The expense must be reasonable. If you're unsure about something, save the receipts and discuss it with a qualified tax professional.
Expenses such as rent and utilities for commercial space, computers, and office supplies are examples of business expenses that typically are deductible.
4. Use depreciation for more costly assets and fixtures. If you buy something to use in your business that you anticipate using for many years, you typically can't deduct the entire cost at once. Rather, you deduct a portion of it for several years.
The amount and length of time you can claim depreciation depends on how the expense is categorized and the length of its useful life. These are defined by the government.
If you have a significant amount of purchases that are subject to depreciation, it's a good idea to have a tax professional do your taxes so you can make sure you're depreciating them using the right method and getting the maximum possible deduction.
5. Check tax and licensing obligations with your state or local government. State and local governments also may tax businesses, or require you to maintain certifications or licenses if you want to operate your business.
Your local small business association or chamber of commerce typically will have information on the licenses required to operate a small business in your area.
Visit the website of your state or local government tax authority to find out what taxes you must pay as a business owner. For example, if you have employees you typically are required to pay for worker's compensation insurance.
6. Set up the correct withholding for any employees. If you hire regular employees and pay them salary or hourly wages, you must withhold federal taxes and Social Security from their paychecks. You also may need to withhold for state taxes.
Many small businesses contract with a payroll service to take care of their withholding and the issuing of paychecks for them. Talk to business owners in your area to find out how they handle payroll.
7. Pay quarterly estimated taxes. As a business owner, you typically must pay taxes on a quarterly basis and then reconcile on the business tax return at the end of the year. Your state may have estimated tax filing requirements as well.
Depending on the nature of your business, you also may have to collect state or local sales tax for all purchases.
8. Use a tax preparation service to simplify the process. Many companies that offer bookkeeping services also have tax preparation services. Connecting the accounts together can save you a lot of hassle because they will automatically categorize your deductions and estimate quarterly tax payments for you.
As with bookkeeping services, tax preparation services are only as good as the information you put into them. If you're unsure about whether something qualifies as a deduction, talk to a qualified tax professional.
Before you can improve your financial health, you need to analyze your current finances. Keep track of your expenses for a month and look at where you are spending the most. Use extra money to pay down debts, build an emergency fund, and save for your retirement. Although saving might seem difficult, it’s actually quite easy once you find out where your money is going.
Part 1 Tracking Your Spending.
1. Record your spending. Record all purchases that you make in a month. Write down the amount spent, the day, and the time. Some of the more popular methods include:
Create a spreadsheet. Remember to enter every purchase or expense. You should probably hold onto receipts so that you don’t forget how much you spent during the day.
Keep a notebook. This is a lower-tech option, but it is convenient. Carry your notebook around with you and record purchases as soon as you make them.
Use checks. This is an old-fashioned option, but you can easily track your expenses when your monthly bank statement arrives.
Use an app. Many apps are on the market that help track your spending on your smartphone. The most popular include Mint.com and Wesabe.com.
2. Add up your fixed expenses. Your fixed expenses don’t change month to month. Common fixed expenses include the following: Rent or mortgage, Insurance, Car payment, Utilities, Debt repayment.
3. Look closer at your discretionary spending. Your discretionary spending is any spending that isn’t fixed. Instead, it goes up and down each month. Pay attention to what you are spending money on. Break out the amounts spent on the following: Groceries, Eating out, Gas, Clothes, Hobbies/entertainment.
4. Pay attention to when you spend the most. Look at the days and times when you make most of your discretionary purchases. Do you buy impulsively immediately after work? Do you spend too much money on the weekends?
You might need to change your routine, depending on when you spend. For example, instead of pulling into the mall on your way home from work, you can change your route so that you don’t pass the mall.
If you’re a weekend spender, you can try to fill your time with other hobbies, such as exercise or visiting friends.
5. Compare your spending to the 50-20-30 rule. According to this rule, your monthly expenses should shake out this way: 50% should go to essentials, such as food, rent, and transportation. 20% should go to saving and debt reduction, and 30% should go for discretionary spending.
The 50-20-30 rule probably won’t work for many people. For example, your fixed expenses like rent might eat up more than 50% of your budget. If you have debts, then you might need to spend more than 20% to pay them down. Nevertheless, the 50-20-30 rule can help you identify where you are falling short. It also gives you something to work towards. If necessary, reduce your debt load by refinancing or paying down debts.
Part 2 Looking Closer at Your Debts.
1. Draw up a list of your debts. Go through your paperwork and find information on your debts, then draw up a list including the following: Name of the account, Total current balance, Monthly payment, Interest rate.
2. Pull a copy of your credit report. You might not remember all of your debts, so you should go through your credit report to make sure you haven’t forgotten anything. In the U.S., you are entitled to one free credit report annually from each of the three national credit reporting agencies. Don’t order the report from each agency. Instead, order them all by calling 1-877-322-8228.
You can also visit annualcreditreport.com. Provide your name, date of birth, address, and Social Security Number.
3. Check if you can reduce your debt load. Depending on your situation, you might be able to lower the overall amount you pay on your debts. Although this might not lower your monthly payments, you will ultimately save money in the long-term. Consider your options:
You might be able to refinance a 30-year mortgage into a 15-year mortgage. This will probably increase your monthly payments, but you can save big on interest.
Call up your credit card companies and ask for a better interest rate. This will lower your monthly payment and your overall debt.
Consolidate debt. For example, you can transfer credit card debts to a balance transfer credit card, or you can take out a lower-interest personal loan to pay off debts.
4. Find ways to reduce your monthly debt payment. In a cash crunch, you’ll need to reduce how much you pay each month, even if you end up paying more over the long-term. You can lower your monthly debt payments in the following ways:
You might be able to stretch out the length of the loan. For example, you might refinance a car loan and stretch out the repayment period to six years.
If you have student loans, you can ask for deferment or forbearance. These options temporarily suspend your payments, though interest will continue to accrue with forbearance. When you get back on your feet, you can begin making payments.
Debt consolidation can also reduce your monthly payments, depending on the interest rate and repayment period.
5. Pay off your debts. You need to pay back your debts, preferably sooner rather than later. Some of the more popular approaches to debt reduction include the following:
Debt avalanche. You pay the minimum on all debts except the one with the highest interest rate, to which you dedicate all extra money. Once that debt is paid off, you commit all resources to the debt with the next highest interest rate.
Debt snowball. With this method, you pay the minimum on all debts except the smallest one. You devote all available money to this debt until it is paid off, then you focus on the remaining debt that is the smallest. This method can give you momentum as you see your smallest debts disappear.
Debt snowflake. You look for ways to save money every day and make multiple payments each month to your debts. You can combine the debt snowflake method with either the avalanche or snowball method.
Part 3 Reducing Your Expenses.
1. Set a savings goal. Ideally, you should save 15-25% of your monthly paycheck. This means that if you bring home $2,000 a month, you should save between $300 and $500. That might not be a realistic goal right now, depending on your expenses.
If you can’t save 15%, then work on ways to reduce your discretionary spending. Every little bit helps, and there are many ways to save every day.
2. Reduce your spending on food. Stop eating out and instead cook at home. Buy a cheap cook book and have fun making new recipes. Remember to buy groceries in bulk for extra savings.
Clipping coupons will help reduce the amount you spend each week. Find coupons in your local newspaper or in the circular at the grocery store.
Use popular apps such as Checkout 51, Grocery IQ, and Coupons.com.
3. Find cheap entertainment substitutes. Everyone needs to unwind a little bit. However, you can usually find a cheaper substitute for your favorite activity:
Instead of paying for a gym membership, exercise outdoors. Join a jogging or walking group, or do pushups or sit-ups in the park.
Get your library card and check out books and DVDs instead of paying for them.
Instead of joining friends for happy hour, host a potluck at your house. Ask all guests to bring a dish or a bottle of wine.
4. Cut your electricity use. Install LED lightbulbs, which are four times as energy efficient as regular lightbulbs, and remember to unplug electrical devices when you aren’t using them.
You might also weatherize and insulate your home for increased savings. Obtain a home energy audit and apply for any local government programs. An energy audit can reduce your energy expenses by 5-30%.
5. Reduce your fixed expenses. These can be the hardest to reduce because they often require that you make big lifestyle changes. However, consider whether you can make any of the following changes, especially if you are living beyond your means:
Move in with friends or family. If you can’t afford your rent or home, then you might need to crash at someone’s place, at least temporarily. This can save a lot of money.
Take public transportation. Sell your car and pocket the money. You’ll also save on insurance and gas.
Get cheaper insurance. You can lower your auto or homeowners insurance by shopping around using an online aggregator. When you find a cheaper option, call up your current insurer and ask them to match it. If they won’t, you can switch.
6. Freeze your credit cards. Reduce the temptation to spend by freezing your cards in ice and carrying only cash on you. If you’re afraid of carrying cash, get a secured credit card or reloadable debit card.
Part 4 Saving for the Future.
1. Build a cash cushion. If your car broke down or you lost your job, could you continue to pay the bills? Build a cash cushion by saving six months’ worth of expenses. Start small, by putting aside whatever extra money you can spare.
Don’t let debt repayment get in the way. Most financial experts recommend that you build up at least a small emergency fund at first—say, three months. Then you can tackle your credit card debt.
Ideally, you can do both at the same time—contribute some money to your emergency fund and some extra to paying debts down quickly.
2. Contact Human Resources about retirement plans. You might be surprised that your employer offers a retirement plan. Call up HR and ask. Also check whether or not they will match any of your contributions.
For example, some employers might match up to 4% of your base salary. This means you contribute 4% and they contribute 4%. If you only contribute 3%, then they will match that.
3. Research IRAs. If your employer doesn’t offer a retirement plan, don’t worry! You have plenty of options to choose from. The two most common are Individual Retirement Accounts (IRAs) and Roth IRAs. You can open an account with many online brokers. Choose which IRA works for you:
IRA. With a traditional IRA, your contributions are tax-free. This is a good choice if you anticipate being in a lower income tax bracket when you retire.
Roth IRA. The big advantage of a Roth IRA is that your withdrawals will be tax free. However, you pay taxes on your contributions. This is a good option if you anticipate being in a higher income tax bracket when you retire.
Before you can improve your financial health, you need to analyze your current finances. Keep track of your expenses for a month and look at where you are spending the most. Use extra money to pay down debts, build an emergency fund, and save for your retirement. Although saving might seem difficult, it’s actually quite easy once you find out where your money is going.
Part 1 Tracking Your Spending.
1. Record your spending. Record all purchases that you make in a month. Write down the amount spent, the day, and the time. Some of the more popular methods include:
Create a spreadsheet. Remember to enter every purchase or expense. You should probably hold onto receipts so that you don’t forget how much you spent during the day.
Keep a notebook. This is a lower-tech option, but it is convenient. Carry your notebook around with you and record purchases as soon as you make them.
Use checks. This is an old-fashioned option, but you can easily track your expenses when your monthly bank statement arrives.
Use an app. Many apps are on the market that help track your spending on your smartphone. The most popular include Mint.com and Wesabe.com.
2. Add up your fixed expenses. Your fixed expenses don’t change month to month. Common fixed expenses include the following: Rent or mortgage, Insurance, Car payment, Utilities, Debt repayment.
3. Look closer at your discretionary spending. Your discretionary spending is any spending that isn’t fixed. Instead, it goes up and down each month. Pay attention to what you are spending money on. Break out the amounts spent on the following: Groceries, Eating out, Gas, Clothes, Hobbies/entertainment.
4. Pay attention to when you spend the most. Look at the days and times when you make most of your discretionary purchases. Do you buy impulsively immediately after work? Do you spend too much money on the weekends?
You might need to change your routine, depending on when you spend. For example, instead of pulling into the mall on your way home from work, you can change your route so that you don’t pass the mall.
If you’re a weekend spender, you can try to fill your time with other hobbies, such as exercise or visiting friends.
5. Compare your spending to the 50-20-30 rule. According to this rule, your monthly expenses should shake out this way: 50% should go to essentials, such as food, rent, and transportation. 20% should go to saving and debt reduction, and 30% should go for discretionary spending.
The 50-20-30 rule probably won’t work for many people. For example, your fixed expenses like rent might eat up more than 50% of your budget. If you have debts, then you might need to spend more than 20% to pay them down. Nevertheless, the 50-20-30 rule can help you identify where you are falling short. It also gives you something to work towards. If necessary, reduce your debt load by refinancing or paying down debts.
Part 2 Looking Closer at Your Debts.
1. Draw up a list of your debts. Go through your paperwork and find information on your debts, then draw up a list including the following: Name of the account, Total current balance, Monthly payment, Interest rate.
2. Pull a copy of your credit report. You might not remember all of your debts, so you should go through your credit report to make sure you haven’t forgotten anything. In the U.S., you are entitled to one free credit report annually from each of the three national credit reporting agencies. Don’t order the report from each agency. Instead, order them all by calling 1-877-322-8228.
You can also visit annualcreditreport.com. Provide your name, date of birth, address, and Social Security Number.
3. Check if you can reduce your debt load. Depending on your situation, you might be able to lower the overall amount you pay on your debts. Although this might not lower your monthly payments, you will ultimately save money in the long-term. Consider your options:
You might be able to refinance a 30-year mortgage into a 15-year mortgage. This will probably increase your monthly payments, but you can save big on interest.
Call up your credit card companies and ask for a better interest rate. This will lower your monthly payment and your overall debt.
Consolidate debt. For example, you can transfer credit card debts to a balance transfer credit card, or you can take out a lower-interest personal loan to pay off debts.
4. Find ways to reduce your monthly debt payment. In a cash crunch, you’ll need to reduce how much you pay each month, even if you end up paying more over the long-term. You can lower your monthly debt payments in the following ways:
You might be able to stretch out the length of the loan. For example, you might refinance a car loan and stretch out the repayment period to six years.
If you have student loans, you can ask for deferment or forbearance. These options temporarily suspend your payments, though interest will continue to accrue with forbearance. When you get back on your feet, you can begin making payments.
Debt consolidation can also reduce your monthly payments, depending on the interest rate and repayment period.
5. Pay off your debts. You need to pay back your debts, preferably sooner rather than later. Some of the more popular approaches to debt reduction include the following:
Debt avalanche. You pay the minimum on all debts except the one with the highest interest rate, to which you dedicate all extra money. Once that debt is paid off, you commit all resources to the debt with the next highest interest rate.
Debt snowball. With this method, you pay the minimum on all debts except the smallest one. You devote all available money to this debt until it is paid off, then you focus on the remaining debt that is the smallest. This method can give you momentum as you see your smallest debts disappear.
Debt snowflake. You look for ways to save money every day and make multiple payments each month to your debts. You can combine the debt snowflake method with either the avalanche or snowball method.
Part 3 Reducing Your Expenses.
1. Set a savings goal. Ideally, you should save 15-25% of your monthly paycheck. This means that if you bring home $2,000 a month, you should save between $300 and $500. That might not be a realistic goal right now, depending on your expenses.
If you can’t save 15%, then work on ways to reduce your discretionary spending. Every little bit helps, and there are many ways to save every day.
2. Reduce your spending on food. Stop eating out and instead cook at home. Buy a cheap cook book and have fun making new recipes. Remember to buy groceries in bulk for extra savings.
Clipping coupons will help reduce the amount you spend each week. Find coupons in your local newspaper or in the circular at the grocery store.
Use popular apps such as Checkout 51, Grocery IQ, and Coupons.com.
3. Find cheap entertainment substitutes. Everyone needs to unwind a little bit. However, you can usually find a cheaper substitute for your favorite activity:
Instead of paying for a gym membership, exercise outdoors. Join a jogging or walking group, or do pushups or sit-ups in the park.
Get your library card and check out books and DVDs instead of paying for them.
Instead of joining friends for happy hour, host a potluck at your house. Ask all guests to bring a dish or a bottle of wine.
4. Cut your electricity use. Install LED lightbulbs, which are four times as energy efficient as regular lightbulbs, and remember to unplug electrical devices when you aren’t using them.
You might also weatherize and insulate your home for increased savings. Obtain a home energy audit and apply for any local government programs. An energy audit can reduce your energy expenses by 5-30%.
5. Reduce your fixed expenses. These can be the hardest to reduce because they often require that you make big lifestyle changes. However, consider whether you can make any of the following changes, especially if you are living beyond your means:
Move in with friends or family. If you can’t afford your rent or home, then you might need to crash at someone’s place, at least temporarily. This can save a lot of money.
Take public transportation. Sell your car and pocket the money. You’ll also save on insurance and gas.
Get cheaper insurance. You can lower your auto or homeowners insurance by shopping around using an online aggregator. When you find a cheaper option, call up your current insurer and ask them to match it. If they won’t, you can switch.
6. Freeze your credit cards. Reduce the temptation to spend by freezing your cards in ice and carrying only cash on you. If you’re afraid of carrying cash, get a secured credit card or reloadable debit card.
Part 4 Saving for the Future.
1. Build a cash cushion. If your car broke down or you lost your job, could you continue to pay the bills? Build a cash cushion by saving six months’ worth of expenses. Start small, by putting aside whatever extra money you can spare.
Don’t let debt repayment get in the way. Most financial experts recommend that you build up at least a small emergency fund at first—say, three months. Then you can tackle your credit card debt.
Ideally, you can do both at the same time—contribute some money to your emergency fund and some extra to paying debts down quickly.
2. Contact Human Resources about retirement plans. You might be surprised that your employer offers a retirement plan. Call up HR and ask. Also check whether or not they will match any of your contributions.
For example, some employers might match up to 4% of your base salary. This means you contribute 4% and they contribute 4%. If you only contribute 3%, then they will match that.
3. Research IRAs. If your employer doesn’t offer a retirement plan, don’t worry! You have plenty of options to choose from. The two most common are Individual Retirement Accounts (IRAs) and Roth IRAs. You can open an account with many online brokers. Choose which IRA works for you:
IRA. With a traditional IRA, your contributions are tax-free. This is a good choice if you anticipate being in a lower income tax bracket when you retire.
Roth IRA. The big advantage of a Roth IRA is that your withdrawals will be tax free. However, you pay taxes on your contributions. This is a good option if you anticipate being in a higher income tax bracket when you retire.
