It is always preached to small business owners to keep personal and business accounts very separate. One is church and the other is state. However, for businesses that are quite small, invariable one seeps into the other. It then gets confusing for SMB owners or accountants to answer the question “how did we do last month” when there is money coming in and going out through so many sources and flowing in different directions. Pay checks. Investments. Business perks or assets. So the first step is to start with a simple compilation of current cash and investment accounts.
Draw up an Excel sheet that has different columns accounting for cash of personal and business Checking and Savings accounts, and Investment accounts (like IRA, brokerage etc.). This will add up the cash and investments in all accounts. Then note the Total Change, Monthly Change, YTD etc. to get the Average Monthly Change. Make sure you do this every month on the same date for accuracy (for instance on the first of each month to get the numbers for the end of the previous business month). It’s a pretty straightforward index of whether you’re building wealth and value.
You might ask us then whether financial statements don’t suffice. Financial statements are very valuable and an absolute requirement. However, they don’t cater to the issue being discussed in this blog, i.e. what is going on overall with both personal and business accounts. A financial statement may report on income, balance sheets, cash flows or retained earnings. And they help you understand that aspect of the accounting and finances. But say, for instance, you make a personal withdrawal from the business account, the cash flow will show a deduction, however the personal account will show an increment. And what you really want is a snapshot across all accounts! Accounting software may not necessarily help you to track an overall value.
While it’s quite cheering to watch the Monthly Change, pay attention to YTD and Monthly Average for facts and information that can be analysed or used in an effort to gain knowledge or make decisions.
- YTD gives you your overall net worth – are you adding, maintaining or losing value.
- The Monthly Average metric shows you how much you have left over at the end of each month. This gives you little bit of insight since income for an SMB tends to be a fluctuating factor, so this helps you decide whether you have a little extra to spend on something you require.
Bear in mind that this little strategy is not a productivity indicator. You could have had a smashing business month but get the actual payment only belatedly. While accounting software or an actual accountant will always give you the factual data, this simple method will help you track value (either added or reduced).