No matter how large or small your business is, unless you keep a tight rein on your finances, things will begin to unravel very quickly. Cash flow is a major factor in the demise of small businesses and new start-ups. 95% of businesses fail within the first five years. There are many reasons why this is the case, but inadequate capitalisation of the business and poor cash flow are both significant factors.

It doesn’t matter how great your ideas are or how successful you are at selling them to potential clients, if you don’t manage your finances property, the business will not survive. There is a chance the business will fail regardless, since the wider economic climate is impossible to control, but staying on top of your finances will certainly maximise your chances of success.

DIY Accounting

The good news is that it is very easy to track income and expenditure and although it may become necessary to hire an external consultant to advise you at a later date, in the early days, DIY accounting is well within the remit of an entrepreneur with no prior business administration experience.

In the days before computers, small businesses generally used a cash accounting system to record their income and expenditure. All transactions were recorded in cash books, which were then balanced at the end of each day. You didn’t need any specialist knowledge to maintain simple books, which was perfect for small businesses. At the end of the accounting year, the books and all related paperwork were passed to an accountant, who produced End of Year Accounts for HMRC.

Simple Spreadsheets

Maintaining paper accounts is time consuming and there is a large margin for error, although some small businesses do prefer to track their finances this way. Using a simple spreadsheet system is a lot easier. Accountants will often format a spreadsheet for their clients to use, so all they have to do is input data. Macros and formulas perform the required calculations and at the end of each accounting period, all the start-up has to do is send the spreadsheet to their accountant for verification.

This works well for small businesses where the cash accounting system is ideal, but once your business grows and you need to start accounting for VAT, asset depreciation and other more complex transactions, it is wise to upgrade to accounting software.

Cloud-Based Accounting Systems

There are many accounting software packages available for small businesses. At the lower end of the scale, there are free software solutions such as Wave Accounting, which are cloud-based. Free software is perfect for sole-traders and start-ups looking for a stress-free way to manage their finances, but “free” means you only get core accounting capabilities, which won’t be enough once the business begins to expand.

Paid-For Accounting Software

Paid for cloud-based accounting software systems such as QuickBooks and FreshBooks offers more capabilities for start-ups and small businesses. Most accountants are familiar with packages such as QuickBooks, so there won’t be a problem when you need pass the data to your accountant.

As your business grows and becomes more complex, it is worth hiring in a consultant to help you manage your finances. Tracking finances is an essential part of running a small business, but without expert guidance, you could miss out on valuable tax breaks. A financial consultant can also conduct audits and advise you on restructuring and provide other expert services.

Don’t make the mistake of ignoring financial record keeping. There is no point in working hard to grow your business if you don’t have a clue about your financial situation from one day to the next. After all, if your cash flow dries up, you won’t have a business!