News:

Skill.jobs Forum is an open platform (a board of discussions) where all sorts of knowledge-based news, topics, articles on Career, Job Industry, employment and Entrepreneurship skills enhancement related issues for all groups of individual/people such as learners, students, jobseekers, employers, recruiters, self-employed professionals and for business-forum/professional-associations.  It intents of empowering people with SKILLS for creating opportunities, which ultimately pursue the motto of Skill.jobs 'Be Skilled, Get Hired'

Acceptable and Appropriate topics would be posted by the Moderator of Skill.jobs Forum.

Main Menu

Financial Tracking 101: Best Implementation Practices and Best Tools

Started by grace.cdc, October 22, 2020, 01:08:49 PM

Previous topic - Next topic

grace.cdc

Finance tracking can help you keep tabs on the money coming in and going out of your business and aid you in identifying ways to grow your enterprise.

Financial tracking can help you cut costs, prepare for taxes and identify growth opportunities. Financial tracking is essential to managing your business, because if you don't have a clear idea of how much money is coming in and going out, you could end up with a shortfall when you need the money the most. That may prevent you from pursuing a new initiative or bringing on more staff, or otherwise blunt your growth prospects. It could also spell your business's demise if you can't keep the lights on because your budgeting fell to the wayside.

What is financial tracking?
Financial tracking, otherwise known as expense tracking, is the process of keeping tabs on your income and spending, ideally on a daily basis. It's achieved by recording receipts, invoices and business expenses into some form of accounting ledger. It goes hand in hand with budgeting and is a valuable way to keep tabs on your business finances.

Over time, financial tracking will give you a clear idea of incoming cash and outgoing costs, enabling you to forecast your finances, find ways to slash costs and identify growth opportunities. It can also help you secure a loan, prevent you from scrambling at tax time and limit fraud.

Without financial tracking, "you will have no idea of whether you are making a profit or have a loss," Maxine Stern, volunteer mentor for Chapel Hill-Durham SCORE, told business.com. "I've had clients who think they are making a profit but, for various reasons, didn't see they were losing money. If they were tracking expenses, they would have noticed."

Why is it important to track your financials?
Tracking finances may seem like a no-brainer, but for time-crunched small business owners, it can easily be forgotten. That can be disastrous for your business both now and in the future. Finance tracking not only gives you a complete picture of your business but also reduces the time it takes to prepare for taxes and allows you to identify potential issues quickly, which keeps employees honest. Financial tracking can be a vital way to identify growth opportunities, exit businesses that aren't performing well and help you manage expenses.

How do you track your finances?
There are a variety of methods for tracking finances. Some small business owners prefer to track expenses and income the old-fashioned way: by using a pen and paper. But nowadays, most turn to mobile apps, accounting software and cloud-based applications for help. Here are some common financial tracking methods.

Cash accounting vs. accrual accounting
Before you begin budgeting and tracking your finances, you have to choose whether you're going to use a cash-accounting or accrual-accounting method.

With cash accounting, you record transactions as they occur. As soon as a payment is received, you recognize it as income. The same applies to business expenses: When you make a payment, you record that transaction as an expense. Cash accounting is best for very small businesses that don't have inventory, freelancers and sole proprietors.

For small businesses that carry inventory and/or get paid after a service is provided, accrual accounting tends to make more sense. With this accounting method, you record income as soon as the product is sold or the service is performed, even if you haven't received payment yet. You record an expense when you receive the bill, not when you pay it.

Accrual accounting has a lot of benefits. For one, it tells you precisely how much money you make and spend in a certain time frame. That information gives you insight into when your business is busy and slow, thus helping you project further out than you could with a cash accounting method.

"Most small businesses start off with cash accounting, and as they grow and get bigger, they move to accrual accounting," said Bob Smith, managing director in the New England office of CBIZ & MHM.

Manual finance tracking vs. accounting software
After you choose an accounting method, you have to decide if you'll do the financial tracking yourself or use a software application. Tech-averse small business owners may prefer a manual process, while time-strapped ones may turn to accounting software or a mobile app for help.

Small business owners who don't want to purchase software or go with a cloud-based application can use Microsoft Excel or Google Sheets. However, keep in mind that using a spreadsheet is more time-consuming, and the onus falls on you to record income and expenses. Sure, they'll be stored in a digital spreadsheet, but it requires work on your part. Using software to track expenses tends to be the most efficient way, but depending on the application you choose, it can be another expense. [Read related article: Financial Formulas Businesses Can Use in Excel]

Once you choose an accounting software or application, consider connecting your financial institutions with the software. This makes it much easier to track your income and expenses than it would be to input every transaction manually. Be mindful of the security the software or app provides when sharing financial information with an application. The last thing you want is for your small business's financial information to fall into the wrong hands. Make sure the vendor you're working with keeps security top of mind and goes to great lengths to protect your data.

Financial tracking using mobile apps
If your accounting software has a mobile app, use it. A mobile component will enable you to input expenses and income on the go, whether that means snapping a picture of a receipt or inputting income after you leave a winning sales meeting. Not all accounting software offers a mobile app, but if you are out of the office a lot, it will become a budget lifesaver.

What are some tools for financial tracking?

There are several tools available to help small businesses track their income and expenses. Here are a few common financial tracking solutions and their benefits:
Google Sheets keeps tracking free.
The cheapest way to keep track of your money is through Google Sheets. This spreadsheet program is free to use, but it has some limitations in the number of cells and columns per sheet. If you're operating a very small business with one income stream and only a handful of expenses, Google Sheets can be an ideal expense tracker.

Microsoft Excel keeps you organized.
Microsoft Excel is another option. It isn't free, but you probably already have it if you are among the legions of business owners who use Microsoft's Office Suite of productivity tools. Excel is an attractive option for businesses because it is easy to use and many people are familiar with it. With Excel, you can track finances, run reports, and set up templates and formulas that are unique to your business.

Accounting software does the work for you.
Accounting software, whether it's based in the cloud or installed locally on a computer, enables small businesses to automate many finance-tracking processes. With accounting software, you can send one-time invoices or schedule them at regular intervals, send automated payment reminders and reconcile your bank transactions. This type of software also generates financial reports, giving you an overall picture of your financial position. There are many accounting software programs to choose from, many of which are cloud-based. QuickBooks and FreshBooks are examples of accounting software programs that have built-in finance and expense tracking.

Small business owners can also opt for a mobile app, which is a free or low-cost way to stay on top of income and expenses. Mobile apps may not provide all of the bells and whistles that accounting software offers, but if you're looking for a quick and easy way to stay on top of the money coming in and going out of your business, these tools can be useful.

What are the best practices for tracking financials?
One of the best ways small business owners can ensure they are tracking finances accurately is to keep personal expenses separate from business ones.

"You want to have a totally separate bank account, or otherwise it's just bad business," Stern said. "You won't be able to see what's happening to your business."

Use accounting software to take the work out of finance tracking.
While pen and paper may seem sufficient for very small businesses or sole proprietors, experts say investing in accounting software or using a mobile app is a better option. Sure, it may cost you up front, but free and low-cost applications are available.

Additionally, software can simplify the process, saving you time and ensuring you stay on top of your finances. Many options allow you to create customized reports. Streamlining your finance tracking may require some upfront work, but taking the time to create standard templates will free up time over the long run and reduce the likelihood of costly errors.

Stay on top of finances each month.
You can't just set up finance tracking and then forget about it; you should comb over your finances regularly to spot any inconsistencies that raise red flags or point to inefficiencies that could be streamlined.

"You want to close your books every month and start fresh," Smith said. "If you're tracking your expenses monthly, you will know how you are doing and can make changes in real time."