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If you’re like any normal small business owner, you’re short on time and you’re probably thinking “What is bookkeeping and why do I need to do it?” 

Bookkeeping is a way for you to track and manage your business finances and is one of the many responsibilities that come with being a small business owner. You need to know what’s happening with your business cash flow and finances. It’s a major factor in your success. 

Here, we’ll cover some quality bookkeeping tips you can use to simplify your accounting process and make your life easier.

1. Keep Personal And Business Finances Separate

Keeping your personal and business finances separate is important for a number of reasons. As a small business owner, it’s essential for you to know what’s happening with your business finances. It’s one of the basic metrics for determining if your business is successful.

It’s much harder to know where you stand when you constantly have to decipher your transactions and guess whether it was a personal purchase or a business expense.

This also becomes a problem if you’re using business funds for personal expenses or are spending more cash than you have coming in. But you only see that clearly when there’s a separation between your business and personal funds. 

It doesn’t just apply to your business bank account. Your business should have its own separate business account and business credit card to handle financial transactions. This avoids commingling business and personal funds. 

Keeping things separate helps avoid violating any tax laws that apply to your business taxes. It also keeps you out of hot water by limiting your personal liability in legal situations involving your business. This is by far one of the most important small business bookkeeping tips.Now that you’ve separated your accounts, it’s time to track all of your expenses. Business lunches, printer ink, travel expenses—everything. There are a ton of small business tax deductions you can capitalize on, and every penny counts.

2. Keep Your Receipts

When you make a quick run to the store for business supplies, it’s second nature to ball up your receipt and move on with your day. But if you plan on including that supply run as a tax deduction, then you’ll need to hold on to your receipts. 

The IRS actually requires receipts for all business tax deductions. This doesn’t mean you have to keep a shoebox full of faded receipts though. 

Just snap a picture, verify the info, and categorize the expense. That makes it simple to see where the money is going and even integrates those expenses into your financial statements. Let’s just say your accountant is going to be thrilled with you.

3. Keep Detailed Records

The process of bookkeeping is difficult enough without having the appropriate records to reconcile the books. By keeping well-organized receipts, invoices, and other expenses, you’re making life easier on yourself. 

Your records don’t have to be complicated to be effective. If you’re fond of keeping paper records, keep a secured file cabinet with separate folders for bank statements, payroll, invoices, receivables, receipts, and other important financial information. 

You have the option to make your small business paper-free with accounting software that allows you to scan in your documentation or upload images to manage and organize your expenses in a few clicks. 

To get the most out of the expense side of your accounting software, you’ll want to look for features that allow the software to “read” the scanned information. 

Paired with AI, this helps you reduce the time it takes to enter data from your records and minimize errors. It doesn’t get much simpler than scanning or snapping a photo and reviewing for accuracy. 

Without the receipts to record what expenses your business paid throughout the year, you might have trouble claiming certain deductions at tax time. This might also result in extra time and costs associated with your accountant or bookkeeper.

4. Automate Everything That You Can

There are already enough tasks that take you away from your business. With automation, you can streamline your small business bookkeeping tasklist and get back to doing what your business needs. The right accounting software is a great first step in this direction.

With Lendio’s online accounting software, you get hours of time back by automating tasks like:

• Recurring invoices
• Tracking expenses through linked bank accounts
• Syncing invoices with bookkeeping
• Updating payment statuses

It saves you the manual entry of endless data into a spreadsheet. And there’s no more doing the sales tax and discount calculations by hand. The more bookkeeping tasks you automate, the more time you have for the other aspects of your small business.

If you’re ready to save time and automate your bookkeeping system, check out Lendio’s risk-free plans and pricing.  

5. Keep Track of Mileage or Car Expenses

Do you travel a lot for your business? Keeping track of car mileage and expenses used for business purposes could add up in tax deductions or reimbursements. It’s important to keep impeccable records to take advantage of the deduction for 58.5 cents per mile in 2022.

Each business trip must include the number of miles, the purpose, and the date. If you travel frequently, that can be difficult to manage without the help of technology. There are apps that allow you to track and log your business mileage by linking with your phone’s GPS. 

Remember that your business shouldn’t pay for your personal vehicle expenses. That’s still part of keeping your personal finances separate from your business.

6. Set Aside Money for Taxes

Each year, business owners get hit with tax obligations they weren’t prepared for. At a minimum, you should be saving at least 30% of your income in preparation for your annual or quarterly taxes. Not saving money for tax preparation can result in fines and penalties. 

Nobody wants that. 

The best thing you can do is automate a portion of your income to be deposited into a business savings account. This keeps you from accidentally spending the money you’ve been setting aside while also staying prepared for taxes year-round. 

It’s easy to forget the tax deadlines for businesses when you have so much else to do. It might be helpful to set an automatic reminder for when the deadline rolls around each year.

7. Set Aside Time to Review The Books

Even if you’re not the one doing the bookkeeping and payroll, it’s important for you to block out time to review the accounting records and financial statements with your professional bookkeeper. It keeps you up to speed with how the business is performing and growing. 

And if you’re doing it yourself, it’s especially important to stay on top of your small business accounting. Small business owners often find it challenging to manage cash flow for their company. 

Reviewing some of the financial statements, accounting reports, and accounts receivable data helps you uncover where the money is being held up. It’s best to do this weekly or monthly depending on what works for your business.

Bookkeeping for a small business is time-consuming and complex, especially if that’s not your strong suit. 

If you don’t have the money to hire an accountant or bookkeeper yet, online accounting software might be the best option for you to get your accounting in order and save time on bookkeeping. 

Once you have that down, you can make the business decisions needed to continue making profits, serving your community, and delivering on your brand promise.

8. Keep Track of Invoices

Keeping track of invoices is essential to understanding how cash flows into your business. It allows you to analyze trends and establish payment terms that work for you. 

Lendio’s software makes it easy for you to create custom invoices that look professional and provides a clear view of what’s paid, unpaid, and past due. So you know which clients are current and which ones need a reminder email. 

In many cases, you can also integrate your invoices with bookkeeping software to produce financial records and statements that make managing your bookkeeping process smoother. If you’re still accepting cash transactions, there’s a way to track that with Lendio’s software too. 

If you’ve been delivering paper invoices, Lendio’s software gives you the chance to go paper-free and optimize your cash flow with a variety of payment options. So you don’t have to accept cash payments unless you want to.

9. Consider Hiring a Bookkeeper

Hiring a good bookkeeping or accounting service is an investment that saves you time and outsources a painstaking task to someone who specializes in it. Most bookkeeping services are relatively affordable and handle everything from accounting to payroll.

Right around tax time, you’ll be grateful you decided to hire a bookkeeping service. They’ll save you plenty of money and time spent shuffling through receipts. 

Overall, having a solid bookkeeping system is important to keeping your business profitable, efficient, and running smoothly. By integrating the small business bookkeeping tips we’ve covered, you don’t have to be stressed out by the tediousness of tracking finances. 

Instead, you can use bookkeeping software, mileage tracker apps, and invoicing software like Lendio’s software to help you stay on top of everything. If all else fails, you could always hire an accountant to help you keep it all together. 

Disclaimer: This article is not intended as legal or financial advice. Consult your financial and legal professionals for professional advice tailored to your personal circumstances.

10. Adopt Cloud Bookkeeping Software

Ditch the spreadsheets and ledgers and get cloud bookkeeping software. Tech can do practically all of the tedious bookkeeping for you. Okay, not everything, but a bookkeeping platform can automate your invoicing, expense tracking, income categorization, and financial reports. That adds up to a lot of saved time.

Software doesn’t replace the need for professional accounting guidance, but it does simplify the minutia of running a business. It’ll help you get your finances in order and keep them in order. Plus, by using a cloud-based solution, you’ll always have real-time financial data on your business’s performance—no need to wait until end-of-week or end-of-month reconciliations.

Make sure your bookkeeping tool also has high-quality document management features. The right tool will streamline the process of managing financial documents like invoices, daily expenses, payables, receivables, and receipts. The software should also allow you to easily share your files with your accountant—no copy/paste or screenshots necessary. Less time bookkeeping means more time focusing on growing your business.

11. Create Cash Flow Forecasts

This process is where bookkeeping turns from entries to insights. Yes, bookkeeping is a necessary evil for legal purposes, taxes, and audits, but it also informs and drives your business strategy.

With detailed financial records, you’ll be better able to forecast your cash flow. With accurate cash flow forecasts, you’ll always be prepared to make the best financial decisions for your business. These insights will help you avoid dangerous amounts of debt and leverage your existing capital to its utmost potential. Coming full circle—these informed business decisions will improve your financial health and help you qualify for financing.

12. Pay Your Taxes

Remember when we talked about separating your personal and business expenses? Yeah, tax time is when you really reap the rewards of that upfront decision.

Income tax, payroll tax, unemployment tax, excise tax, sales tax, property tax…that’s a lot of taxes. Don’t let the fees creep up on you come tax season.

If you’ve been consistent and organized with your bookkeeping, tax time will be a breeze. If you’re using a solution like Sunrise, you can simply invite your accountant to access your transactions and financial reports —they’ll take care of the rest. Easy peasy.

13. Regularly Review Your Financial Records

Financial reports won’t do you much good if you never use them. Make it a habit to frequently analyze your statements. Keyword: analyze. Don’t just glance at them or give them a quick read—dive into the details. These are the same reports lenders will be looking at to decide if you qualify for financing. You should be looking for the same red and green flags they’re trying to discover.

To some degree, you should check your financial records every day. At the end of each day, make sure the money in the bank matches the receipts. By monitoring your transactions daily, you’ll be able to catch errors, fraud, and unexpected fees before it’s too late.

While it’s important to track day-to-day transactions, you also need to review the big picture with month-to-month statements. The profit and loss statement, balance sheet, and cash flow statement are your most important financial reports. These telling financial documents will give you quick and deep insights into your business’s health. They’re also the first thing lenders and investors will look at when examining your business’s potential.

Make sure to block off time in advance to take care of your bookkeeping tasks. You’re likely extremely busy, and many things might seem immediately more important than tracking your day-to-day finances. Don’t slip into the procrastination trap—set aside time at the end of each day and month to reconcile your books.

The Bottom Line

Overall, having a solid bookkeeping system is important to keeping your business profitable, efficient, and running smoothly. By integrating the small business bookkeeping tips we’ve covered, you don’t have to be stressed out by the tediousness of tracking finances. 

Instead, you can use bookkeeping software, mileage tracker apps, and invoicing software like Lendio’s software to help you stay on top of everything. If all else fails, you could always hire an accountant to help you keep it all together. 

Disclaimer: This article is not intended as legal or financial advice. Consult your financial and legal professionals for professional advice tailored to your personal circumstances.

If you don’t know where you’re going, how will you get there? When you're running a small business, you need a map that keeps you on the right road to reach your goals. 

Otherwise, you're just working hard every day and hoping things will turn out for the best. The bad news is that they rarely do.

That's where financial forecasting for small businesses steps in. There's even free accounting software for small business to make the forecasting process easier for you.

What is financial forecasting? 

Forecasting uses the historical performance data of your business to predict its performance in the future. 

Financial forecasts can give you a picture of how your business will perform in the future in best-case, worst-case, and normal scenarios. These forecasts form the foundation for preparing budgets and sales schedules as part of a business plan.

A financial plan is used to construct the three basic financial statements for a business: an income statement, balance sheet, and cash flow statement. 

Sales forecast: Create a sales projection on either a monthly or quarterly basis. Also include sales projections of each product or service and the specific cost of goods sold for each one. 

You need to know which products give you the highest profit margins so you can focus your sales budgeting and marketing efforts on those items. 

Expense budgeting with fixed and variable costs: Expense budgeting includes fixed expenses such as rent and insurance premiums and the variable cost of labor and materials. 

These expenses may change as a company increases revenue, expands to new locations, or hires additional employees. 

Income statement: Forecasts for income statements can change depending on the sales product mix, costs of production, marketing costs, and different pricing strategies to meet competition.

Preparing different income statements for various conditions can give you an idea of the profitability of your business for multiple strategies.

Balance sheet: Assets and liabilities present the financial health of a small business with different strategies. For example, some strategies may require that the company carry higher inventory and support increased amounts of accounts receivable. 

Depending on the company's profit margin, the company may need to obtain short-term financing to support the buildup in current assets. Financial forecasts will show you what your company will look like in these circumstances so you can plan in advance if you need to obtain financing.

Cash flow statement forecasting: How will your decisions affect your cash flow statement and the amount of cash in your bank accounts?

A company that is experiencing rapid increases in revenues with low net profit margins may not generate enough internal cash inflows to have enough working capital to support the resulting increase in assets. 

Financial forecasts are critical to planning your cash flow forecast to make sure there’s always enough cash to pay expenses, regardless of the circumstances.

Break-even analysis: The first performance benchmark is to calculate how much sales volume is needed to cover fixed costs. 

This is the absolute minimum that must be met, otherwise, the company would be operating at a loss. Financial forecasting will show you how your break-even revenue levels will change under various strategies.

How to write a financial forecast for your business 

Step 1 - Review your historical financial performance

Are you satisfied with your sales levels? Do you need to revise your marketing strategy or increase the intensity of your sales efforts?

Are you happy with your gross profit margins? Do you need to analyze each product’s cost of production to find ways to improve efficiency or lower costs? 

It’s important to go through each one of your company's financial ratios (liquidity, asset efficiency, profit margins, and debt leverage) and identify those that need improvement. 

If you see, for example, that your current ratio is consistently less than two to one, you could use the forecast to predict the results of improving receivables collection efforts or lowering inventory levels. 

Step 2 - Create a baseline projection

For example, if sales have been increasing at a 10% rate for the past several years, you could reasonably assume that sales will go up another 10% next year. If total expenses have been rising at a 9% rate, you could safely project the same increase for the coming year.

By just making straight-line projections on historical data, you can create a baseline financial projection you can use to test the results of various strategies. 

As an illustration, suppose you want to expand your product line. You could start by modifying the baseline projection to see the effects of increased new product sales and the related costs of production on profits.

Step 3 - Take into account factors that might change the baseline

For quantitative projections, you could use something as simple as taking historical data and making straight-line forecasts into the future. 

Step 4 - Forecast different scenarios

Consider different scenarios. What happens if the economy turns down or if a new competitor appears? How will these events affect your future sales, profits, and cash flow? What actions will you need to take?

Considering different scenarios will help you prepare your business to deal with these challenges. It’s much better if you’re prepared beforehand rather than being caught off-guard and having to scramble. 

Uses of financial forecasting

You can use financial forecasting to:

Plan for the future

Suppose you want to pay down your debts. A forecast can show how much cash will be generated, where it will come from, and how quickly you can liquidate your loans. 

If the debt repayment plan is too slow, you can adjust the forecast and make the changes needed in your operations to increase the cash flow. You may need to change your product mix or find ways to cut expenses to meet the debt repayment schedule you want. 

As your company grows, you may need to add additional employees. You may find that you'll need more salespeople, warehouse personnel, or more administrative support. A forecast will identify when you’ll need the new employees and how much cost they’ll add to your payroll.

If growth requires additional capital equipment, the forecast will identify how much equipment is needed and when it will have to be in place. At the same time, you can begin to solicit price quotes and develop a plan to pay for the purchases.

Establish realistic goals

You may find that your company isn't generating enough internal cash flow to support the rapid increase in assets that come with high growth rates. 

If your business is already leveraged with debt, you might not be able to get additional financing to support the growth. In that case, you'll need to scale back your dreams to a more realistic goal. 

Show to potential investors and lenders 

Lenders want to feel comfortable that you'll be able to repay a long-term loan or manage a business line of credit. You can establish credibility as a small business owner by presenting a well-thought-out cash flow projection that shows them how you’ll be able to repay a loan. 

In addition, you could present different forecasts that show how you'll still be able to repay the loan even if things don’t go as planned.

Lenders want to believe that you're in charge of your business and know how to handle different types of business financing.

Investors want to know that they're going to get a good return on their money to justify taking the risk of making an equity investment in your company. A realistic forecast will show that the company is capable of generating a good return on equity and that the return is likely. 

What tools can help you forecast your financials?

You can even try out different “what-if” scenarios. Financial planning won’t be time-consuming or tedious with these tools.

These software apps will typically come with a set of key performance indicators (KPIs) -- such as monthly sales, gross profit margins, EBITDA, liquidity ratios, and inventory turnover -- that monitor the performance of your business. 

KPIs are like looking at the instruments on the dashboard of your car except, in this case, the indicators are measuring business performance.

Conclusion

Monitor the actual results and look for deviations from the plan to make corrections. This is like driving your car down the road and it drifts off the pavement. You then make a correction to get back on the road. It’s the same idea with your business. 

Some KPIs you can monitor weekly, and others you look at on a monthly basis. 

Resources

1. Entrepreneur: “Preparing for the Future With Better Financial Planning for Small Business”
2. SCORE: “3 Basic Financial Statements You Need to Keep Track of Your Money”
3. Inc.: “Financial Ratios”
4. Entrepreneur: “3 Reasons to Stop Creating Financial Reports Manually”
5. Forbes: “The Value of Key Performance Indicators”

Women own 42% of all U.S. businesses, have 9.4 million employees, and $1.9 trillion in revenue, according to findings by the National Women’s Business Council (NWB). But even though they’re now slightly more likely than men to start businesses, women continue to face unique challenges in access to financing. According to the Federal Reserve Banks Small Business Credit Survey, women-owned businesses apply for financing at similar rates to businesses owned by men but are less likely to receive the full amount they sought (43% vs. 48% of men).

About business loans and financing for women-owned businesses

The good news is that business loans for women aren’t out of reach. There are several loans women can use to run and grow their businesses, whether they need a source of short-term working capital or funding for a large-scale investment.

Microloans for business owners

Microloans are what they sound like: small loans.

These loans are typically much smaller compared to the other loan options discussed so far. They can be a good fit for owners who:

• Haven’t been in business very long
• Have smaller annual revenues
• May not be able to qualify for other business loans, based on their credit
• Don’t need as much financing for their business

A microloan is worth considering for home-based business owners with smaller operating costs or mobile business owners, like food truck operators or DJs.

Microloan programs

Both for-profit and nonprofit organizations offer microloans to women, as well as minorities, and other business owners.

SBA microloan program

The SBA’s microloan program offers up to $50,000 in funding for qualifying businesses. According to the SBA, the average microloan is $13,000. The maximum loan repayment term is six years, and interest rates range from 8% to 13%.

You could use it to:

• Meet your working capital needs to cover initial expenses
• Buy inventory or supplies
• Outfit your business premises with furniture or fixtures
• Buy necessary machinery or equipment

The only thing you can’t use a SBA microloan for is refinancing existing debt or purchasing real estate.

Securing an SBA microloan

Obtaining an SBA microloan follows a specific process. Here's a summary of the steps involved:

1. Identify an intermediary lender - The SBA doesn’t provide microloans directly. Instead, they partner with intermediary lenders, which are usually nonprofit organizations. You can find a list of these organizations on the SBA’s website.
2. Prepare your business plan - Before you apply for a microloan, you’ll need to prepare a comprehensive business plan. This plan should include details about your business, your market analysis, and your organization. It should also include your management structure, product line or service details, marketing and sales strategy, and financial projections.
3. Gather necessary documents - Be ready with your legal documents, business and personal bank statements, balance sheets, income tax returns, and credit report.
4. Submit your application - Apply directly to the intermediary lender. Each lender has its own application process and requirements, so it’s crucial to review these details on their website or contact them directly.

Accion

Accion is a nonprofit that offers up to $50,000 in microloan funding to brand-new and established women-owned businesses. The amount you can borrow depends on which state your business is located in.

Kiva

Kiva is a nonprofit that offers crowdfunded microloans of up to $10,000 with no interest. Repayment terms stretch up to 36 months. The program operates on a peer-to-peer lending model, whereby individuals invest as little as $25 in a borrower's business. Kiva U.S. enables entrepreneurs to leverage their community for the first 25% of the loan during a private fundraising period. After reaching this threshold, their campaign is opened to Kiva's wide network of lenders worldwide. These loans—which have a repayment term of up to 36 months—can be used for a variety of business-related expenses, such as buying inventory, hiring staff, or purchasing equipment.

Grameen America

Grameen America is a nonprofit microfinance organization that provides small loans to women who live below the poverty line in the U.S. They offer microloans ranging from $2,000 to $15,000. Established by Nobel Peace Prize laureate Muhammad Yunus, the organization follows a peer group model. This means that when a woman receives a loan, she must form a group with four other women who will also receive loans. The group meets weekly for financial training and to make loan repayments.

LiftFund

LiftFund is a nonprofit organization that provides extensive small business support in the form of microloans, larger loans, and business education. Their microloan program offers up to $50,000 for startups and up to $1 million for established businesses. The interest rates are competitive, and LiftFund prides itself on providing loans to those who have limited access to capital from traditional sources.

Microloan eligibility requirements

As with any other loan, take your time to review your financial position, the interest rate, repayment terms, and the minimum requirements to qualify.

To qualify for a microloan, business owners typically need to meet certain criteria. These might vary depending on the lending organization, but here are some common requirements:

• Good credit score - Lenders often look at your personal credit score as an indicator of your financial responsibility. A good credit score can increase your chances of securing a loan.
• Business plan - Most lenders require a comprehensive business plan that outlines your business operations, target market, financial projections, and marketing strategy.
• Proof of income - You may need to provide proof of a stable income, demonstrating your ability to repay the loan.
• Collateral - Some lenders may ask for collateral to secure the loan.
• Training or counseling - Certain programs require you to participate in business training and planning sessions before granting the loan.
• Legal documentation - Be ready to provide legal documents relating to your business, such as your business license, incorporation documents, and any lease agreements or contracts you have.
• Business age - Some microloan programs cater to newer businesses, while others might require your business to have been operational for a certain period of time.
• Residency - Many programs require borrowers to live in a specific area or region to qualify for a loan.

Applying for a microloan

Applying for a microloan involves a series of steps that are generally similar across different lenders, with some minor variations.

1. Identify your needs - The first step is to identify your funding needs and how a microloan can help fulfill them. Consider the amount that you'll need, how you plan to use the loan, and how you will repay it.
2. Choose a lender - Next, research various microloan lenders to find one that suits your needs. Consider factors like the loan amount, interest rates, repayment terms, and the lender's reputation.
3. Prepare a business plan - Most lenders will require a business plan that outlines your business model, forecasts your revenues, and demonstrates how the loan will be used to grow your business.
4. Compile necessary documentation - Gather all necessary documentation. This typically includes financial statements, tax returns, and personal identification documents. It's also common for lenders to ask for a credit report.
5. Complete the application - Complete the lender's application form. This could be online or in person, depending on the lender. Be sure to provide detailed and accurate information.
6. Wait for approval - After submitting your application, there may be a waiting period while the lender assesses your application. During this time, they may ask for more information or clarification on your application.

Remember, every lender may have slightly different procedures. It's always best to check with your chosen lender for specific instructions on their microloan application process.

I recently spoke with Jacqueline Vong, founder and president of Playology International, about managing cash flow. Over the course of the interview, she tossed out the term “slush fund” in a positive way rather than with its more nefarious connotation, which was interesting because I thought I was the only person who did that.

The term “slush fund” comes from the era of the actual pirates of the actual Caribbean. The cooks working in ship gallows would skim off the meat grease (known as the slush) because it was in high demand by candle makers and other merchants. The cooks would sell the slush in port, use their proceeds (the slush fund) to live very well away from the boat, and party their way into history as an inspiration to side hustlers everywhere.

You’ve Probably Heard the Term “Slush Fund” in a Different Context

Today, however, slush fund is usually linked to a politician or someone in power ciphering funds to keep in their back pocket for quietly taking care of unexpected inconveniences. While I’d never condone such behavior, the strategy makes good sense. Every business needs some just-in-case money.

Slush Fund = Money Put Aside for When You REALLY Need It

Here’s what we mean about a slush fund for your business: Emergency Cash, Rainy Day Money and D’oh Dough, which may be my favorite alternative. 

A slush fund isn’t “savings,” because it’s not for anything specific like retirement or planned expansion. And it’s not “petty cash” because it’s not for incidentals like catering an unexpected client lunch in your boardroom. And while you should be actively building your corporate savings and making sure to have petty cash on hand, a slush fund is its own thing and it should be respected because life’s curveballs come in fast, especially for entrepreneurs.

Dipping Into Your Slush Fund Can Be a Good Sign

Sometimes, you need the money because the fruits of your labor are paying off, and you need a little bump to put yourself over the finish line. For example:

• You networked your tail off for four months and secured a once-in-life opportunity you know you could land and would regret passing up, but it’s going to cost you $4,500 in prep and travel to put your best foot forward. You’d dip into your slush fund to nail the pitch and close the business.

• After an exhaustive search for a new sales director, you found a candidate you love and who loves you, but your competitor is offering them a $6K signing bonus. You’d raid your slush fund for $7,500 to knock your competitor out of the running.

Or It Could Be to Get Yourself Out of Trouble

You-know-what happens, and sometimes your only option is to suck it up and deal with it. In those moments, having what you need to handle it on your own (i.e., without insurance money, which will raise your premiums), could be your best option. For example: 

• You sent a large run of billboard ads to print but missed a typo that now extends your client’s generous offer for a year longer that they expected to run it, and they’re holding you accountable. You’d leverage your slush fund to cover the reprint costs.

• You thought you found the next big thing, but you were wrong and now you have debts to importers, shippers, graphic designers, and printers. You’d empty your slush fund to pay it all off and start building it again with an important lesson learned. 

How Do You Build a Slush Fund?

My thinking was (and is) that a slush fund becomes more important as a business gets bigger, has more experiences, and is exposed to more opportunity and risk. That’s why I felt okay building my slush fund slowly and methodically over time. From the beginning, I ciphered 1.5% of my monthly revenue into my slush fund. I set up my business bank account to do it automatically and I track it in my bookkeeping software. I never noticed it missing day to day, but I really noticed when I had the money to take advantage of a down commercial real estate market and significantly upgrade my office.

If you’re a new business putting aside 1.5% a month (which amounts to $1.50 for every $100 you bring in), you won’t see much of a bump quarter over quarter—and that’s okay because you probably won’t need the money anyway so keep building it.

Whether you’re new or established, there will absolutely be times when you don’t think you can afford to part with 0.0015% of your revenue, much less 1.5 percent. I’d strongly encourage you to stick with it, if for no other reason than to maintain strong habits.

BTW, there will also be times when dipping into your slush fund isn’t practical or when your slush fund balance won’t quite cut it. That’s when a business line of creditcomes in handy.

When Should You Start Building a Slush Fund?

Should you start building a slush fund now? Yes. But if you think it’s silly or a waste, know this: I thought the same thing when I opened my business. Then I started putting away the 1.5% on the strong advice of my accountant. After a while, I didn’t really notice that I was stashing some money aside—until it was there when I needed it. 

If you start now, it’ll be there for you too.

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

ROI stands for “return on investment,” and it’s a measurement of how much you earn on the money you spend or borrow. For example, if you buy a machine for $10,000 in January, but having the machine makes you $20,000 by the end of the year, the return on your investment is 200% because you made 100% of your investment back, and then doubled it.

An ROI measurement can be applied to just about anything, from a machine to an employee to a location — or even to  money you might borrow for your small business.

What is Financing?

Financing is money you borrow to move your company forward. You could use financing to hire people, purchase assets, move into new markets, upgrade your technology, or anything else. Regardless of how or where you apply financing, your goal is to eventually have that money produce a positive ROI (is it worth taking otherwise?).

So how do you determine the potential ROI of financing? Here are a few simple steps to get started.

Start by Calculating the Total Cost of Financing

Obviously, there’s the money you’re borrowing. But on top of that will be interest you’ll have to pay as well as any fees. These should be taken into account when you calculate how to break even. 

For example, a $10,000 loan paid over 12 months at a 20% interest rate will take $11,290 in total revenue to break even. The extra $1,090 – that’s your interest. 

BTW, if you don’t have the full loan cost on hand, you can use a financing calculator to figure it out. 

Estimate the Result of Your Financing

How much you’ll need to make is the easy part. The trickier component is projecting how much that single loan or other financing, which could be anything from a line of credit to a merchant cash advance, will produce.

At this point, it’s time to do a bit of educated guessing. And it’s particularly challenging if the financing is being used for multiple reasons because some might yield positive ROI while others might not. But for the sake of simplicity below, let’s say financing is being used for a single specific purchase. Here are a few examples:

• With the new WidgetMaker Plus, a widget manufacturer can make 200 widgets per hour versus the 50 they’re making now with the original Widgetmaker. This will put them in more stores, which will open the market to new customers.

• A second delivery van will let a retailer deliver items to 30 customers per day, an increase from 15 customers previously. 

• Hiring a CFO will give a lawyer more time to get out there and get new clients because they’re spending less time doing administrative financial stuff.

Once you understand how your production will increase with the new investment, you can track your ROI. Increasing production means increasing sales. 

• If the widget maker can make an extra 150 gadgets per hour and sell them for $10 each, then they will make $1,500 more per hour than they could before.

• If the average delivery order for the store is $45, the owner will make $675 more per day by doubling their deliveries. 

• If the lawyer can land one new $12,000/year client a month, they’d make an additional $78K per year.

With these calculations, you can track how much your business stands to profit from spending that extra money. 

Apply the ROI Formula

The good thing about the ROI formula is that it never changes. Once you know it, you can apply it to any money you spend, whether it’s financing or retained earnings. This is the formula:

ROI % = Profit / Investment x 100

So, if $10,000 in financing that costs $11,290 with interest will generate an extra  $15,000 in sales over the course of the year, the profit would be $3,710 ($15K –  $11,290), and the ROI would be $3,710 divided by $11,290 x 100, which comes to 33%.

BTW, if you need a refresher on gross profit and net profit, read this.

What’s a Good ROI for Financing?

So how much ROI do you need to justify financing? Honestly, that will depend on what you’re using the financing for because certain purchases will have different benchmarks.

So, if we go back to our examples from above, the widget maker should expect a double-digit ROI because the machine is a single cost (minus yearly maintenance) and should keep producing ROI well after it’s paid off. 

On the flipside, the lawyer who hires a CFO will probably want to pay top dollar for that CFO and, even with that CFO installed and working, they can’t guarantee that they’ll close a $12K client every month. For that entrepreneur, anything above 0% ROI would be a win.

Whatever your expectations are, this formula is an excellent guide for determining whether or not financing would be generally profitable for your business and so worth your time and investment. 

The Best Way to Ensure Positive ROI on Financing is to Find Affordable Financing

If a certain loan or financing alternative isn’t a good option for your business, consider looking for other financing options that can help you to save. For example, you may find a different short term financing option with more favorable terms. You can also look into credit cards and equipment financing and other alternatives, depending on your needs.

Lendio’s single application can match you with financing options that fit your business and financing plans and goals — plus you can access more than 75 lenders with a single application that takes about 15 minutes to complete. Visit our online lending hub to learn more.

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

Even if you have an accountant on staff, there are still some financial documents you should be familiar with as a small business owner: income statements, balance sheets, and cash flow statements. Each gives insight to a business’s financial health, although income statements and balance sheets display different information, which is used to create a cash flow statement. Plus, they’re all important to potential lenders and investors.

Let’s start at the end: cash flow statements.

While an income statement shows how your business earned money across time, your balance sheet provides a snapshot of your company’s financial health in the present. Lenders may want to evaluate both along with the cash flow statement you create from them as part of their funding decision.

What’s a Cash Flow Statement?

A cash flow statement displays how much actual cash is moving in and out of your company’s accounts. It is built based on the information recorded on your income statement and your balance sheet, which is why it’s important to understand those financial documents, too. Lenders will see a cash flow statement as an indicator of your business’s financial status.

What’s an Income Statement?

Before you can build a cash flow statement, you’ll need an income statement. As you might expect, an income statement shows a business’s revenues. It also includes costs of goods sold (COGS) and expenses over a period of time. This document is also called a profit and loss (P&L) statement. Income statements are created on a regular basis, often quarterly and annually. The income statement shows whether the business has turned a profit or operated at a loss over a specific period of time.

“This report tells you how much money a business makes, and a lot more,” says Eric Rosenberg of Due. “A well-run bookkeeping operation includes details for where you spend and where your money comes from. For example, I can look at my P&L for a quick summary of how much I make from writing, how much I make from advertising, how much I spend on business travel, and how much I pay for computer and internet costs. Each business would have different accounts for its own income and spending categories.”

Over the long run, you can compare past income statements to your current ones to see how your business is running across its life. Lenders also value income statements because they reveal whether your business is profitable over time—and therefore whether they should continue to fund it.

Income Statement Examples

You can find income statements online for publicly traded companies, like Apple.

Imagine your company XYZ has earned $327,000 in revenue during the fiscal quarter and the COGS, meaning the direct costs related to each item sold, is $190,000—your gross profit is $137,000. Say you have $120,000 in expenses, like rent, wages, and marketing. Your operating profit for the quarter is $17,000.

What’s a Balance Sheet?

Your balance sheet, on the other hand, shows your assets, liabilities, and shareholders’ equity (which may also be called owners’ equity). The amount of your assets should always equal (or balance to) your liabilities and shareholders’ equity added together.

Examples of assets include cash in your bank account, property, and vehicles. Liabilities are debts, like loan repayments. Shareholders’ equity is calculated from the other 2 factors: it’s how much the company would be worth if all assets were sold and liabilities were paid down.

While an income statement shows how your business earned money across time, your balance sheet provides a snapshot of your company’s financial health in the present. For this reason, lenders also evaluate balance sheets as part of their funding decisions to analyze the strength of your business. And over time, comparing past balance sheets with present-day ones can also function as a diagnostic tool for your business’s success.

“Each section of the balance sheet can provide you with important financial information you can use to improve your small business,” writes Elizabeth Macauley in The Hartford. “Be sure to consider how each section intersects, interacts, and connects as well. Considering the whole picture can give you better insights to help you make the correct future financial decisions.”

Balance Sheet Examples

Publicly traded companies, like Walmart, also publish their balance sheets online.  

Say your company XYZ has $800,000 in assets and $436,000 in liabilities. The shareholders’ equity is $364,000. On this balance sheet, both the assets side and the liabilities plus shareholders’ equity side balance.

Is an Income Statement Part of a Balance Sheet?

Income statements and balance sheets are separate documents, but both are often viewed together and generated at the same time (e.g., every quarter). Each document shows different but related financial information. In a broad sense, income statements show how your company has performed in the past, while a balance sheet provides a valuation of your company in the present moment.

What Comes First, an Income Statement or Balance Sheet?

When preparing financial documents, like for a lender, your income statement should be placed before your balance sheet. Generally, a lender will be interested first in your company’s profitability, which is displayed on your income statement. The other data is still important, as it will speak to whether the company is a good investment or not.

Should an Income Statement and Balance Sheet Match?

While the information on your income statements and balance sheets will be different, it should all reflect your business’s financial situation as accurately as possible. The bottom line of your income statement and your balance sheet equation will differ because they utilize different data.

How to Track Your Financial Statements 

If you’re not already using a bookkeeping tool to keep your business’s financial records, consider adding one like Sunrise—which offers tools and services that simplify financial report generation and organization (you can also use Sunrise to invoice customers, manage expenses, and process certain transactions). Plus, Sunrise offers everything from free DIY bookkeeping tools to personal bookkeeping services. 

The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice, and all information, content, and materials contained within are for general-information purposes only. Readers of this post should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter.

Behind every business is the story of an owner who wanted to change something. Some of these stories are personal. Some are inspiring. And others are brand stories inspired by an unfortunate event or tragedy, which is the case in each of the following cases. 

SIDS Leads to a Product for Prevention

One of the best-known stories of a company created in tragedy’s wake is Halo, which specializes in safe bedding for newborns. In 1991, Bill Schmid lost his firstborn to sudden infant death syndrome (SIDS), otherwise known as crib death. He wanted to prevent any other parent from experiencing the same tragedy. This led to the development of the SleepSack—the very first wearable blanket. 

Today, the SleepSack is available in more than 1,700 hospitals nationwide. Their educational safe-sleep materials are distributed to over 10,000 new parents annually, and the company’s products are also created even for babies that fall into smaller sizes—like those spending the first weeks of their lives in the NICU. 

Schmid and Halo continue to develop products that help new parents protect their newborns and guide them to sleep safely. The company thrives because it was built on the values of protecting kids and preventing tragedies. Since 2010, they have donated more than $9 million to hospitals to support healthy births.    

Cancer Remission Leads to a Fresh Start

Sarah Fonteyne is the founder of Halcyon Naturals, a company focused on self-care. Before starting her business, said Fonteyne when she shared its brand story with The Real Life, Fonteyne worked in music as a tour manager and promoter—careers not known for a low-key lifestyle. The idea to create scents and candles without harmful toxins emerged from Fonteyne’s own recovery from cancer and subsequent remission. 

Fonteyne hopes her candles and other scented products will help others live the way she does now: mindfully and in the moment. Halcyon Naturals’ motto—to “create freedom through the power of aromachology”—mirrors this goal. Still, she cautions against confusing her brand story with her personal experience: “I have always been an entrepreneur,” Fonteyne previously told the Enterprise League. “Cancer was a moment in my life, but it in no way defines who I am as a person or…an entrepreneur.” 

Business Closing Leads to Another Opening

In December 2020, NPR’s Planet Money interviewed Roberto Ortiz, a veteran software designer who had just moved to San Francisco to launch a business that connected restaurants to wholesale food providers. The idea was sound—until COVID hit and shut down restaurants across the country.  

Ortiz and his partners debated for a while how they would make their business work. They spent so much time on Zoom calls doing so, in fact, that they decided to start their own video conferencing experience. They wanted to make the “Ritz Carlton of virtual events,” targeting business professionals who needed better features than Zoom or Microsoft Teams could offer. They called it Welcome. 

As of the end of 2020, their business had 30 employees and has raised $12 million. The pandemic brought many entrepreneurs down, but some saw inspiring ideas that made surviving this past year easier. 

Moving Forward—Even after a Hurricane

For some entrepreneurs, a tragedy doesn’t inspire new business ideas but rather lights a fire to move their existing company forward. Lorenzo Marquez—founder of Marqet Group, a full-service marketing agency—had grown his team to 10 employees in just 5 months. His business was growing, and he was feeling confident. 

Then Hurricane Harvey devastated Houston. Marquez and his family lost their home. At the same time, the Marqet Group’s employees were scattered across the city (and country, as some evacuated) and tried to pick up the pieces of their lives.   

However, Marquez built back. His office building was flooded, but he fought his fears and kept moving forward. Little by little, he regrew his business—and today, it’s stronger than ever. 

"Looking back on that horrific experience, I can honestly say that the most beneficial thing that I did for both my family and business was to develop the courage to take action despite all the fear that was attacking me,” Marquez tells Entrepreneur. 

The Value of Your Brand’s Origin Story

A brand's origin story is an important part of connecting with an audience. Notes marketer Neil Patel, “Before you sell anything, you need to connect, and not just with a handshake or sending out one email. You need to emotionally connect with the people you want to be your customers now, and for the rest of their lives.” One of the best ways to do this is by peeling back to curtain so the audience sees what drove you to start your business, the hurdles you overcame, and what inspired you.

However, it’s worth mentioning that the stories retold here are not intended as a roadmap to success—they were selected to illustrate how unforeseen circumstances can sometimes become the catalyst to making a positive difference in a life, outlook, or world, too. Entrepreneurship is merely one way to turn a tragedy into a reason to give your own life new meaning or even to help others.

The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice. All information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter.

For small business owners, bankruptcy can feel like an obscenity to say out loud. When you read about big corporations going bankrupt in the news or hear entrepreneur friends share that their small businesses filed for bankruptcy, it sounds like they’ve reached a tragic end.

The truth is that bankruptcy doesn’t mean you’ll never work again—it doesn’t even mean that your business has to shutter for good. While the bankruptcy process for small businesses can be traumatic, expensive, and financially damaging, there are ways to mitigate the stress of bankruptcy as well as methods to protect your business and your assets during the process.

Knowing the different options available for small businesses considering bankruptcy is the first step. Before you contact a lawyer or your creditors, think about which type of bankruptcy might fit your situation best.  

What Is Bankruptcy?

Bankruptcy is a legal proceeding decided in federal court involving an individual or company that is unable to repay outstanding debts. Typically, the process begins with a filing on behalf of the debtors, although occasionally debtors can begin the process with the court. During the process, the court takes into account the debtor’s assets. Depending on the type of bankruptcy, the types of debt involved, and the business’s structure, the court may decide that the assets are used to repay debts.

It’s common knowledge among entrepreneurs that most small businesses fail: Bureau of Labor data shows that about 50% of small businesses close within 5 years of opening. However, not every business that closes files for bankruptcy. Most companies that consider bankruptcy are having issues with repaying debt.

Still, small business bankruptcies happen all the time. In the first quarter of 2021, a study found that there were 6,289 commercial bankruptcies in the United States.  

You often hear the different types of bankruptcies referred to as “chapters”—this refers to their chapter in the US Bankruptcy Code. Another recent survey of small businesses found that of respondents that filed for bankruptcy, 51% filed for Chapter 7, 22% filed for Chapter 11, and 27% filed for Chapter 13. We’ll talk more about these chapter types below.

When Should a Business File for Bankruptcy?

Instead of thinking about how successful—or not—your business is, when considering bankruptcies, think most about your debts and your ability to repay them.

“The truth is, if your business is consistently unable to keep up with your debts and expenses, it’s already bankrupt—or on a very short trajectory towards it,” explains Meredith Wood in AllBusiness. “Filing for bankruptcy protection is meant to help you get out of this untenable situation and keep many of your personal assets. You may be able to keep your business open while you pay off debt by reorganizing, consolidating, and/or negotiating terms.”

Filing for bankruptcy can lead to the closure of your business, but it can also be used to save your company by allowing you to renegotiate your debt situation. Either way, it doesn’t foreclose your ability to start another business in the future.

“While filing for bankruptcy does take recovery time, it isn’t the all-time credit-wrecker you may think,” Wood continues. “Typically, after 10 years, it is removed from your credit history, and you’ll likely be able to get financing several years before that.”

If you feel like your debt and business expenses are overwhelming your small business’s ability to continue, you should think about bankruptcy. The next step is to determine what type of bankruptcy represents the best way to move forward.  

The 3 Types of Small Business Bankruptcy

The 3 main types of bankruptcies utilized by small businesses are Chapter 7, Chapter 11, and Chapter 13. There are even more forms of bankruptcies for individuals, companies, and cities, but these 3 types are the main commercial options available to you.

The type of bankruptcy you pursue will mostly depend on how your business is structured and how you plan to move forward after filing bankruptcy.

Importantly, any bankruptcy filing places a temporary stay on your creditors and puts your repayments on hold while the court considers your situation.

Chapter 7: Liquidation

In Chapter 7 bankruptcy, a company is closed and its assets are liquidated in order to pay off its debts. In the popular imagination, this situation is likely the one most people think of when they think about bankruptcy. If you believe your small business has no viable future, Chapter 7 might be your best option. Chapter 7 might also make sense if your business doesn’t have a lot of assets to begin with.

Sole proprietorships file a personal Chapter 7, which takes into account both personal and business debts.

When Chapter 7 proceedings start, a “means test” is conducted on the applicant’s income. If the income is over a predetermined level, the application is denied. Next, the court appoints a trustee to take over the company’s assets, liquidate them, and distribute them amongst the creditors.

If it is a sole proprietorship case, a discharge is issued after the creditors are paid, meaning the business owner is no longer obliged to pay any more of the debt in question.  

Chapter 11: Reorganization

If you think your business can continue after bankruptcy, filing for Chapter 11 might represent your best choice. In this type of bankruptcy, the debtor plans to reorganize so that it can repay its debt while continuing operations. Working with a trustee and your creditors, you’ll have to devise an expansive plan that shows how you can repay your debt. Your plan must ultimately be approved by your creditors.

Chapter 11 is commonly talked about in the financial press, but it can be a hard process to navigate for small businesses.

“While Chapter 11 is designed to give distressed but viable businesses a second chance, it has a very poor track record with small and medium-sized companies,” a report from the Brookings Institute notes. “The costs of bankruptcy for small and medium-sized businesses are substantial—often 30% of the value of the business—and two-thirds are liquidated rather than reorganizing.”

There are good reasons to suspect that a Chapter 11 bankruptcy might work best for you if you don’t want to shut down. However, going this route can be expensive and lengthy—many proceedings take a year or longer to complete. It’s worth it to contact a qualified bankruptcy attorney if you want to explore Chapter 11.

Chapter 7 vs. Chapter 11

As complex as it is, you might want to research Chapter 11 if you feel like your business can continue with restructuring.

“The only reason you need to use Chapter 11 at all is to deal with recalcitrant creditors,” bankruptcy lawyer Bob Keach told the New York Times. “If creditors won’t negotiate with you, bankruptcy allows you to cram down a plan of restructuring.”

Remember, filing for Chapter 7 doesn’t mean you can never open another business, although financing might be more difficult to find at first.

Chapter 13: Reorganization for Sole Proprietors

If you’re a sole proprietor with a high income, you can file Chapter 13 bankruptcy. This allows you to keep your assets and property if you agree to a new repayment plan with your creditors. These plans usually last 3 to 5 years.

Does Filing for Bankruptcy Mean Going out of Business?

If you file for Chapter 7 bankruptcy, your business is closed and its assets are liquidated. If you file for Chapter 11, you’ll be allowed to keep your business open under a new plan with your creditors.

Will Business Bankruptcy Affect Me Personally?

A business bankruptcy could impact the business owner if your personal assets were used as collateral for your debts. Importantly, though, you will not go to jail for not paying a business loan.

“It depends on what personal guarantees you made,” Amy Haimerl writes in the New York Times. “Most small business owners put up their home or some other asset as collateral for start-up loans…If you used your house as collateral, it’s possible you would be forced to sell it as part of a Chapter 7 settlement. Under Chapter 11, you may have more luck.”

If you’re a sole proprietor and you file for Chapter 7 but fail the means test, you can file for Chapter 13. However, your repayment plan will be based on your income.

One of the big differences between personal and business bankruptcy is the means test. Individuals have to participate in a means test to determine if they are eligible for a Chapter 7 or a Chapter 13, while businesses do not have to undergo this for a Chapter 11 filing.

If your business is structured as a limited liability company (LLC) or a corporation, then your personal assets should be protected unless you used them to secure a loan.

If you file for bankruptcy as a sole proprietor, your personal credit score will lower significantly. Chapter 7 and Chapter 11 bankruptcies stay on your credit report for up to 10 years, while Chapter 13 bankruptcies stay on your credit report for up to 7 years.

If your business is an LLC or a corporation, its bankruptcy filing shouldn’t impact your personal credit score. However, if you personally guaranteed one of the company’s loans and you fail to repay, your credit score could be dinged.