When you’re a small business owner, every decision carries weight. And every decision falls on your shoulders. When it comes to financial choices, you might just be giving it your best guess, but making lasting changes on your business structure.

Most Common Financial Pitfalls for SMBs

One common pitfall he outlined was solely focusing on sales and earnings, rather than making sure your business is liquid, solvent, and well-capitalized. ”Working capital can be an issue depending on how long customers take to pay or how long the average inventory cycle takes,” Steve included. Adding a line of credit is a great way to protect from a temporary cash crunch as well.

We sat down with founder & CPA, Steve Frank, to get his insights on financials for small business owners. We found out what’s important, what not to waste your time on, and strategies for scalable success.

What Financial Metrics Should Small Businesses Prioritize?

Steve emphasized the importance of cash flow, dubbing it as the king of financial metrics.

“EBITDA (earnings before interest, taxes, depreciation & amortization) is a nice measure of simple cash flow that is available to both debt and equity holders.  But owners need to pay close attention to the balance sheet and the current ratio (current assets / current liabilities) as well,” said Steve.

The CPA found that very often, small business owners get too caught up with driving sales and profits & losses, that they miss the important issues of liquidity and solvency.

What are Liquidity & Solvency?

Liquidity refers to the ease with which assets can be converted into cash without significant loss in value, indicating a company’s ability to meet short-term financial obligations. Solvency, on the other hand, assesses a company’s ability to meet long-term financial commitments by comparing its total assets to its total liabilities. It signifies the overall financial health and stability of a company. Prioritizing EBITDA allows you to keep a close watch on these factors.

Using Cash for Growth

If the goal is growth, then regularly investing your business’s money in fixed assets is the name of the game. “Whether it be machinery, equipment, furniture, or vehicles, this upkeep is important,” Steve included. The CPA also shed light on tax-saving opportunities such as Section 179 and bonus depreciation to reduce taxable income.

Section 179 allows businesses to deduct the full purchase price of qualifying equipment or software purchased or financed during that tax year. This deduction is particularly beneficial for small businesses as it can help reduce taxable income and lower their tax liability in the current year.

Maintaining Financial Records

For small businesses with limited resources, the CPA recommended Quickbooks Online for its user-friendly interface and comprehensive features. The basic plan, which costs around $30 per month, offers “a customer database, invoicing and collection module, vendor database, accounts payable and payment ability, and much more in addition to the traditional accounting software,” said Steve.

He highlighted the importance of timely reconciliation and accurate coding of transactions, and how Quickbooks allows for all of this. “Once you link up your business bank account to Quickbooks, you are able to reconcile and code transactions right in Quickbooks every time new bank activity is detected,” Steve brought out.

Reducing Unnecessary Expenses

The CPA advocated for the preparation of an annual budget as a way to manage expenses. Regularly comparing actual performance to the budget allows you to address issues proactively. “The budget should be a work in progress, not just a tool prepared in December

 of the prior year and put away in a drawer until the next December,” Steve stated. Small business owners are often surprised at where their cash actually goes, once analyzed. Prepping an annual budget and regularly comparing the results steers your business clear of any surprises.

What Kind of Baseline Schedule Should SMBs Use for Managing Finances?

The CPA emphasized the importance of using a good accounting software in conjunction with spreadsheets for regular maintenance. “Once the transactions and journal entries have all been made for the month, export the financials to Excel or a similar software to perform budget to actual analysis. This should be done monthly, or quarterly at the very least,” Steve suggested.

Once the books are closed and the financials exported for each of March 31st, May 31st, August 31st, and December 31st, the owner and CPA should work together to determine the proper amount of quarterly estimated tax payments.

He also recommends discussing estimated taxable income after 10 or 11 months so you can plan some larger purchases in the current year, and minimize tax liability.

“For instance, if the owner is putting off the purchase of a key piece of equipment costing $100,000 and necessary for growth until 2Q of the following year, and current 11 month numbers show taxable income for the year of $150,000, it may make sense to purchase this December instead of next June, in order to reduce current taxable income to $50,000 by taking advantage of bonus and section 179 depreciation on taxes.”

Steve Frank, CPA

CPA in Reading, PA & Beyond

By prioritizing key metrics, avoiding common pitfalls, and leveraging technology effectively, entrepreneurs can navigate the financial landscape with confidence and steer their businesses towards sustainable growth.

Ready to get your business’s finances set up the right way? Schedule a call with 13 Consulting for expert advice.