Bert had gotten his LLC off the ground. For more than a year, he had been doing about as well as he could have hoped. But he also had the sense that he was missing something. His LLC was doing a lot of business. Yet it wasn’t generating the profit that Bert felt it could. And without that extra profit to reinvest in the LLC, improving its equipment and operations, Bert could see that he might be treading water for a long time. Bert also knew that treading water meant soon going under. He needed better insight into his LLC’s finances.
Finances
Business finances can be a mysterious thing. An LLC can generate a lot of sales but make little money. Members can contribute a lot of capital but see little return. Money is like water. It finds the lowest places to seep slowly or quickly out. The LLC manager who does not have a clear view of the LLC’s finances plays a dangerous game. Expenses can shoot up unexpectedly, just as revenue can fall off. A trend gone unnoticed and unaddressed can soon turn into an avalanche and then into a catastrophe. The signals to adjust may have been there all along, but without a way of recording, reporting, and monitoring the signals, the LLC manager has little chance for timely noticing and effectively responding. Give serious consideration to how you track your LLC’s finances. You’d be surprised how much trouble you can avoid and how much better you can do.
Budgeting
Budgeting is a key tool for managing your LLC’s finances. A budget estimates expenses against revenue for the month and year. Your estimates may be way off, but at least you have something to work from as a guide. Use benchmark data in your LLC’s field to estimate expenses and revenue. You should be able to find measures from various sources either locally or online. Adjust that data to your LLC’s peculiar circumstances. Do your best to project how you think your LLC should do. Make categories for every major expense such as employee compensation, employee benefits, facility lease, utilities, technology including website and communications, advertising, equipment, supplies, and any other input peculiar to your LLC’s field. Add up expense categories to estimate total expense and compare it to total revenue, to ensure that you can foresee a reasonable profit. Be confident you can make money, or reasonably adjust your expense and revenue estimates until you are.
Recording
Once you have a budget, start recording your LLC’s actual financial performance, including both expenses and revenue, against your budget categories. If you are using bookkeeping and accounting software of your own, it may prompt you to code expense payments and income deposits consistent with your budget categories, so that the software can prepare reports. If you are using an outside bookkeeping and accounting service, your check register and bank statements may suffice, with whatever additional interpretation you or your service requests or requires. One way or another, rigorously record your LLC’s financial transactions. Don’t be lax. Your LLC’s success may depend on accurate and timely financial reporting.
Reporting
Once you have a budget and are in the routine of regularly recording expenses and revenue, you can examine monthly and annual profit-and-loss statements, also called cash-flow statements or P&Ls, to see how your LLC is performing. A profit-and-loss statement (P&L) organizes the LLC’s expenses and income into their budget categories, to track against your category estimates. Monthly P&Ls allow you to see whether expenses and income are ahead or behind estimates and aligned or out of whack with one another. Without a budget, you are shooting in the dark. Without a P&L showing how your LLC is performing against the budget, you are without a clue.
Monitoring
Once you have monthly P&Ls available to you, examine them closely for your LLC’s financial performance. Notice any category that is out of line with the budget. Investigate that misalignment until you understand what caused or contributed to it. Then address the misalignment as your business judgment best informs you. You may be fine with an excess expenditure if you expect it to increase revenue. But you may instead see an excess expenditure as wasteful and put a prompt stop to it. The same is true with revenue, that departures from budget estimates can be either good or bad, depending on the cause, reason, judgment, or rationale. But make those judgments regularly. Don’t ignore your opportunity and responsibility to closely monitor your LLC’s finances.
Adjusting
Use your LLC’s monthly P&Ls to adjust your LLC’s expenditures, sales practices, and initiatives. Use your LLC’s annual P&Ls to adjust next year’s budget for both expenditures and revenue. Managing your LLC’s finances is a cyclical process. Budgeting feeds reporting, while reporting corrects processes and projects new budgets. Get into the rhythm of that all-important cycle. Ensure that you have timely reports and that you take timely actions in earnest. Your financial management of your LLC is just as important as, if not more important than, your management of its personnel and processes for delivery of its goods or services.
Accounting
Your LLC must maintain financial records not only for your effective management but also to report income, expenses, and profit to its members and to federal and state tax authorities. Your LLC may owe state or local sales tax to report and pay, and federal, state, and local employment taxes. Your LLC may need to send IRS Form W2s to its employees and IRS Form 1099s to contractors to whom your LLC made payments. Your LLC will also need to account to its members for distributions so that members can report those distributions on their income taxes. Ensure that your LLC can meet all accounting and reporting requirements. Acquire accounting software and retain accounting services as necessary.
Key Points
Your LLC should make budget estimates of revenue and expenses.
Your LLC should promptly record all actual revenue and expenses.
Your LLC should prepare cash-flow statements for you to examine.
Use cash-flow statements to adjust expenses and sales practices.
Your LLC’s records should account to members and authorities.