Sales through coffee-club memberships for your online small business have doubled in a year. This increase in revenue is exciting, but it also means you have more financial tasks. It’s time to focus on your accounting and bookkeeping.
Accounting helps you understand your business’s financial health and make smart decisions. It’s about analyzing your finances to see if you should grow, hire, invest, borrow, or look for investors. Bookkeeping is key for accounting. It involves collecting and recording financial data like invoices, receipts, payroll, and taxes.
Key Takeaways
- Keep personal and business money separate to make tax time easier and keep your finances clear.
- Use trusted accounting software like QuickBooks, FreshBooks, or Xero to make financial reports automatic and avoid mistakes.
- Consider hiring bookkeeping services to save time and get help from experts in the field.
- Know and follow the sales tax laws in the places where you sell or operate your business.
- Keep detailed financial records and receipts for at least three years, but seven is better.
What is Accounting and Bookkeeping for Small Businesses?
Accounting is the process of putting together a business’s financial information. It helps understand a company’s financial health and guides decisions on growth, hiring, and more. Bookkeeping is a big part of accounting. It deals with things like invoices, payroll, and tax payments, making sure the financial data is correct.
Having good bookkeeping and accounting is key for a small business to do well. It helps keep track of money and makes sure everything is in order for taxes and loans.
Understanding the Roles of Accounting and Bookkeeping
For small businesses, accounting and bookkeeping are vital. They help manage financial data and business operations. Keeping an eye on spending and income is crucial for good cash flow.
Without these systems, it’s easy to mismanage money or not have the right records for taxes or loans. Accounting gives insights into a business’s financial health. This helps owners make smart choices about growing the business, hiring, and investing.
Importance of Proper Accounting and Bookkeeping
For small businesses, having accurate bookkeeping and accounting is a must. It helps owners keep an eye on their financial data and manage cash flow. Without it, owners might lose track of finances, miss tax deadlines, or struggle to get loans.
By using good accounting and bookkeeping practices, owners can understand their financial health better. This leads to smarter decisions for growing and keeping the business strong.
“Proper accounting and bookkeeping are essential for small businesses to effectively manage their finances. Implementing systems and best practices for keeping track of expenditures and revenues is key to managing cash flow.”
Separate Business and Personal Expenses
As a small business owner, it’s key to keep your business and personal money separate. This makes managing your business bank account and personal finances easier. It also limits your legal risk if there are any problems.
Opening a Business Bank Account
Start by opening a business bank account just for your business. This makes it easy to keep track of your business spending for tax time. It also keeps your personal money safe from your business debts or legal issues. If you’re the only one running the business, you’ll need your Social Security number. If you have employees, you’ll need an Employer Identification Number (EIN) to open the account.
Using a Business Credit Card
Getting a business credit card is also a good idea. It helps you build a business credit score. This keeps your personal credit score separate from your business spending. It also might give you better loan options for your business later on.
| Business Bank Account | Business Credit Card |
|---|---|
| Separate business and personal transactions | Build business credit score |
| Easier to track and verify business expenses | Protect personal credit score |
| Protect personal assets from business liabilities | Access better lending terms for the business |
By separating your business and personal money, you’ll manage your finances better. You’ll also make your small business stronger for the future.
Utilize Accounting and Bookkeeping Software
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Keeping track of income and expenses is key for good accounting. Bookkeeping and accounting software automate tasks like sending invoices, sorting expenses, and paying employees. They also reduce errors and offer insights for managing finances well.
Popular bookkeeping software for small businesses include QuickBooks and Wave. These platforms have features like accounting automation, invoice management, and financial reporting. Over 88% of customers say QuickBooks makes their business more successful.
| Bookkeeping Software | Key Features | Benefits |
|---|---|---|
| QuickBooks |
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| Wave |
|
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Choosing the right accounting software helps small business owners manage finances better. It improves bookkeeping accuracy and gives insights to grow the business.
Create a Budget and Manage Cash Flow
Effective business budgeting and managing cash flow are key for small business success. Making a budget helps you see your income and costs. It lets you find ways to save money and spot chances to grow.
Budgeting for Projected Revenue and Expenses
Small businesses that budget do better financially, studies show. Budgeting lets you check how you’re doing against your plans. This helps you make smart choices for your business.
Strategies for Improving Cash Flow
- Shorten customer payment terms to get money faster.
- Stretch supplier payment times to improve cash flow management.
- Build in a margin of error when forecasting cash flow to account for unexpected events.
- Establish a cash reserve, typically 3-6 months of operating expenses, to weather financial challenges.
- Obtain a business credit line or credit card to use as a safety net during cash crunches.
Keeping a healthy cash flow and liquidity is vital for small businesses. By using these strategies, you can improve your cost efficiency. This sets your business up for long-term success.
“Many profitable businesses have faced closures due to cash flow issues rather than lack of customers or profits.”
Being proactive with cash flow management and budgeting is crucial for small businesses. By planning ahead and using smart strategies, you can better control your finances. This puts your business in a strong position for expansion opportunities.
Keep Detailed Records and Receipts
Keeping accurate records is key for any small business’s success. They help with tax deductions and make sure you follow IRS rules. As a business owner, it’s vital to keep detailed records of your money matters.
Organizing and Filing Receipts
Organizing your receipts is a big part of keeping records right. Here are some tips to help you:
- Create folders or envelopes for your receipts, sorted by expense type, vendor, or supplier.
- Use digital tools like apps or cloud software to scan and store your receipts online. This makes them easy to find and check.
- Check your receipts against your business’s financial records often to make sure they match.
- Remember, the IRS wants you to keep records for at least three years. Many accountants suggest keeping them for seven years.
| Document Type | Retention Period |
|---|---|
| Cash register tapes, deposit info, receipts books, invoices, and Forms 1099-MISC | Key for tracking total income |
| Canceled checks, account statements, credit card receipts, and invoices | Important for showing what you spent |
| Records about assets (like machinery, furniture, etc.) | Include when you got it, how much you paid, any updates, how it wore down, and when you got rid of it |
| Records for employment taxes | Keep these for at least four years |
Having a well-organized record keeping system gets your small business ready for tax time and any IRS checks. Spending time on good records means you’ll have a clear view of your finances and can relax knowing you’re in good shape.
Understand Sales Tax Laws and Requirements
As a small business owner, it’s key to keep up with sales tax laws, especially for ecommerce businesses. In Texas, sales tax is important for businesses with a presence or economic ties in the state.
The base sales tax rate in Texas is 6.25%. Local areas can add an extra 2%, making the top rate 8.25%. The tax is collected from buyers and sent to the Texas Comptroller of Public Accounts.
To have sales tax nexus in Texas, a business can have a physical spot or make over $500,000 in sales in a year. Once you have nexus, you must register for a seller’s permit and collect sales tax, even if you don’t meet the sales threshold anymore.
| Sales Tax Rate | Nexus Thresholds | Tax Collection Requirements |
|---|---|---|
| 6.25% state rate Up to 2% local surtax Maximum combined rate: 8.25% |
Physical presence Economic nexus: $500,000 in total sales in the past 12 months |
Register for seller’s permit Collect and remit sales tax |
Ecommerce and small businesses selling to Texas should talk to an accountant or tax lawyer. They can help with sales tax laws, economic nexus, local rates, and industry rules.
Knowing and following Texas’ sales tax rules helps small business owners avoid fines and stay in line with state and local tax laws.
accounting advice for small businesses
As a small business owner, managing your accounting and bookkeeping can feel overwhelming. But, using the right accounting tips can make it easier. Here are key small business accounting tips to keep in mind:
- Separate Business and Personal Expenses: It’s important to keep your business and personal money separate. This makes bookkeeping and tax reporting accurate.
- Utilize Accounting and Bookkeeping Software: Tools like QuickBooks can make accounting tasks easier. They save time and reduce mistakes.
- Create a Budget and Manage Cash Flow: A detailed budget and watching your cash flow closely can help spot financial issues early.
- Keep Detailed Records and Receipts: Organizing your receipts and records well helps track expenses, claim deductions, and get ready for taxes.
- Understand Sales Tax Laws and Requirements: Knowing your state’s sales tax rules helps you stay compliant and avoid fines.
Using these accounting tips can help you manage your finances better. It helps you make smart decisions and set your business up for success.
| Accounting Software Features | Basic | Intermediate | Advanced |
|---|---|---|---|
| Invoicing | ✓ | ✓ | ✓ |
| Expense Tracking | ✓ | ✓ | ✓ |
| Payroll Processing | ✓ | ✓ | ✓ |
| Inventory Management | ✓ | ✓ | |
| Project Tracking | ✓ | ✓ | |
| Advanced Reporting | ✓ |
Accounting tips for small businesses depend on your company’s size, industry, and needs. Being organized, using the right tools, and getting expert advice when needed can help you with small business accounting. This ensures your business does well.
“Proper accounting and bookkeeping are the backbone of any successful small business. Implementing the right practices can save you time, money, and headaches down the road.”
Choose an Accounting Method: Cash or Accrual
As a small business owner, picking between cash accounting or accrual accounting is a key decision. The method you pick affects how you track and report your money matters.
Cash accounting is a good start for new businesses. It records sales and costs when you get paid, giving a clear view of your cash flow. It’s best for businesses making less than $25 million a year. On the other hand, accrual accounting looks at the big picture, recording deals when they happen, even if no cash has exchanged hands yet. This method follows GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards), making it the norm for big companies and banks.
| Cash Accounting | Accrual Accounting |
|---|---|
| Simpler to maintain | Provides a more accurate and comprehensive view of financial performance |
| Easier to understand for small businesses | Conforms to GAAP and IFRS standards |
| Suitable for businesses with under $25 million in annual sales | Required for businesses with over $25 million in revenue over three years |
| Does not require tracking of accounts receivable or payable | Requires tracking of accounts receivable, inventory, and liabilities |
Think about your business’s size, complexity, and growth plans when deciding between cash or accrual accounting. Cash accounting works well for very small businesses with simple dealings. Accrual accounting is better for companies looking to grow big or wanting a detailed look at their finances.
“The choice between cash and accrual accounting methods can depend on the complexity of one’s business and anticipated sales revenue growth.”
Set Up a Chart of Accounts
A well-designed chart of accounts is key for small businesses. It helps organize finances and aids in making smart decisions. This list includes all your company’s financial accounts. It’s the core of your accounting system, making financial tracking and reporting easier.
To set up a good chart of accounts, start by grouping your accounts into main categories:
- Assets – including cash, equipment, inventory, and accounts receivable
- Liabilities – such as accounts payable, short and long-term debt, and insurance payable
- Equity – covering retained earnings, owner’s capital, and cash dividends
- Revenue – encompassing sales, commissions, and investment earnings
- Expenses – tracking costs like rent, salaries, supplies, and depreciation
Inside these main categories, you can split your accounts further. For example, under “Assets”, you might have “Cash”, “Accounts Receivable”, and “Equipment” as separate accounts.
| Account Category | Account Numbering Range |
|---|---|
| Assets | 101-199 |
| Liabilities | 201-299 |
| Equity | 301-399 |
| Revenue | 401-499 |
| Expenses | 501-599 |
With a detailed chart of accounts, you’ll see your business’s financial health clearly. This helps with better decision-making and planning for growth.
“A well-designed chart of accounts is the foundation for any small business’s accounting organization and financial tracking.”
Determine the Fiscal Year for Your Business
Choosing the right fiscal year for your small business is crucial for managing finances and planning taxes. The fiscal year is a 12-month period for recording your company’s accounting activities. It doesn’t have to match the calendar year.
You can pick a start and end date for your fiscal year based on your business needs. For instance, if you run a seasonal business, pick a fiscal year that matches your busy season. Or, if you like to plan finances by the calendar year, choose January 1st to December 31st.
Choosing a fiscal year that makes accounting and tax easier is key. By aligning your fiscal year with your business cycle, you improve your financial look. This helps with budgeting, managing inventory, and strategic planning.
| Fiscal Year Start | Typical Business Type |
|---|---|
| February 1st | Retail |
| March 1st or April 1st | Home Improvement |
| September 30th | Summer-based Businesses |
| October 1st | Gyms and Fitness Clubs |
While you can choose your fiscal year, some laws and rules might apply. This includes for sole proprietors, partnerships, and corporations. Always check with an accountant or tax expert to make sure your choice follows all the rules.
Automate Invoicing and Billing Processes
Automating invoicing and billing for small businesses can change the game. Using modern accounting software and digital tools, you can make billing smoother, more efficient, and ensure clients pay on time. This automation saves time and boosts billing efficiency.
Businesses like consulting, law, and medical offices gain a lot from automated billing. These systems meet the unique invoicing needs of clients, leading to more revenue. They save time and reduce errors, making customers happier.
Automated billing systems work well with your current accounting software. They accurately track revenue and accounts receivable, using various accounting methods. This integration is key for efficient operations, freeing up time for other important tasks.
These solutions also come with customer payment portals. Clients can easily make online payments, view invoices, and update payment info. It’s important to regularly check these automated billing transactions for accuracy. Reconciling about 10% of monthly transactions helps ensure everything matches up.
Automating your invoicing and billing helps streamline your business. It improves cash flow and lets you focus on what’s important. The perks of automated invoicing, like time savings, billing efficiency, and automated invoicing, can greatly boost your business success.
| Feature | Benefit |
|---|---|
| Automated invoice generation | Saves time and reduces manual errors |
| Scheduled payment reminders | Improves timely payments from clients |
| Integrated payment processing | Enhances cash flow and reduces administrative tasks |
| Customizable invoice templates | Enhances professionalism and brand identity |
| Reporting and analytics | Provides valuable insights for financial management |
Small businesses in many fields, from accounting to marketing, can benefit from automating their invoicing. This streamlining lets you focus on growing your business and serving your clients well.
“Automated invoicing has been a game-changer for our small consulting firm. It has saved us countless hours of manual work and helped us get paid faster, improving our overall cash flow management.” – Jane Doe, Founder of ABC Consulting
Plan Ahead for Taxes and Meet Deadlines
As a small business owner, keeping up with taxes is key. You must estimate your quarterly tax payments. If you think you’ll owe more than $1,000, you need to make these payments. Not paying on time can lead to fines and extra charges.
Estimated Quarterly Tax Payments
To figure out your estimated quarterly tax payments, first estimate your business’s income and expenses for the year. This will give you your projected pretax income and taxes owed. Then, you can make the IRS payments to avoid penalties.
Deductible Business Expenses
You might be able to deduct some business expenses from your taxes. These include:
- Office rent and utilities
- Computers and software
- Office supplies
- Depreciation of equipment and machinery
- Business-related phone and internet bills
- Business and car expenses
- Business travel
- Local property taxes
- Business and health insurance costs
Keeping good records is key to claiming these deductions. This helps you defend them if the IRS checks. Stay organized to save more on taxes.
| Tax Deduction | Deduction Limit | Conditions |
|---|---|---|
| Home Office | Percentage of home used for business | Home must be the main business spot or used often and only for business |
| Business Vehicle Expenses | Actual expenses or standard mileage rate | Vehicle must be mainly for business use |
| Business Travel | Reasonable and necessary expenses | Travel must be for business, not personal |
| Business Insurance | 100% of premiums | Insurance must be for the business, not personal |
Planning ahead and keeping up with taxes helps your small business stay compliant. It also helps you save more on taxes.
Classify Workers Properly: Employees vs. Contractors
It’s key for small business owners to know if workers are employees or independent contractors. This choice affects the money and legal stuff you need to do. If you get it wrong, the IRS can hit you with big fines, including fees for wrong W-2 forms and unpaid taxes. You could even face jail time.
Employees work under your control and you handle their money. Contractors work on specific projects and manage their own time and business choices. The IRS says there are four main types of workers, but for small businesses, it’s mainly about Employees and Contractors.
| Employee | Independent Contractor |
|---|---|
| You have behavioral and financial control over the worker. | The worker retains control over their schedule and business decisions. |
| You withhold income taxes, Social Security, and Medicare from the worker’s pay. | The worker is responsible for their own tax payments and filings. |
| You provide the worker with benefits such as health insurance and retirement plans. | The worker is responsible for their own benefits and expenses. |
If you call a worker something they’re not, you could face big fines and have to pay back taxes. It’s important to get it right and keep good records. The IRS has rules to help figure out if someone is an employee or a contractor.
Getting worker classification right is key for small businesses. Knowing the difference between employees and contractors helps you avoid big problems. This way, you can keep your business on the right side of the law.
Outsource Accounting to Professionals
Small business owners might handle accounting and bookkeeping by themselves if their business is simple and small. But for bigger or more complex businesses, hiring professional accountants is often a good idea. Outsourced accounting services can cut down on mistakes, keep records accurate, find ways to save money, and give valuable insights to help the business grow. Hiring experts to do the accounting can save time and money, especially as the business gets bigger.
Outsourcing accounting can be a smart move for small businesses. It offers many benefits:
- Cost savings: You avoid paying for employee benefits, insurance, payroll taxes, and paid leave.
- Access to expertise: You get to use the specialized knowledge and skills of professional CPA services.
- Improved efficiency: It frees up time for business owners to focus on what they do best.
- Enhanced financial management: You get accurate records, stay in compliance, and plan strategically.
- Fraud prevention: Outsourcing means having an independent team that helps keep your finances secure.
When deciding to outsource accounting, think about your business’s growth, complexity, and what you need. It’s important to time it right. Outsourcing can help during business planning, setting up compliance, and getting ready for audits. By working with the right outsourced accounting provider, small businesses can get ahead with better financial management that’s cost-effective, accurate, and secure.
| Benefit | Impact |
|---|---|
| Cost savings | Small businesses can cut costs by 35% to 70% with outsourced accounting and bookkeeping services. |
| Expertise | Outsourced accounting firms offer specialized knowledge in financial management, compliance, and strategic planning. |
| Efficiency | Outsourcing accounting tasks lets business owners focus more on growing their business and important tasks. |
| Financial management | Outsourced accounting services make sure records are accurate, you follow the rules, and you get strategic financial advice. |
| Fraud prevention | The team approach of outsourced accounting firms helps spot and stop financial fraud. |
“Outsourcing accounting can lead to cost savings and efficient financial management in the long run.”
Conclusion
For small businesses, good accounting and bookkeeping are key to success and growth. By using small business accounting and software, making budgets, and understanding taxes, owners can better manage their finances. This helps them make smart choices for their business’s future.
It’s important to keep personal and business money separate. Watching your cash flow closely and getting help from experts when needed can make your business stronger. Checking financial reports often and using key performance indicators (KPIs) helps owners make better decisions.
Putting effort into accounting and bookkeeping can really help a small business do well. By doing this, owners can make their financial work smoother, follow the rules, and help their companies grow and succeed over time.
FAQ
What is the difference between accounting and bookkeeping for small businesses?
Why are proper accounting and bookkeeping practices important for small businesses?
How can a small business separate business and personal expenses?
How can accounting and bookkeeping software help small businesses?
What are the benefits of creating a budget for a small business?
Why is it important for small businesses to keep detailed records and receipts?
What do small businesses need to know about sales tax laws?
What are the key accounting tips for small business owners?
What are the differences between cash-based and accrual accounting?
How should a small business set up a chart of accounts?
How should a small business determine its fiscal year?
How can small businesses automate invoicing and billing processes?
What do small businesses need to know about estimated tax payments and deductible expenses?
FAQ
What is the difference between accounting and bookkeeping for small businesses?
Accounting is about putting together a business’s financial info to understand its health and make smart decisions. Bookkeeping is the part that gathers all the financial data like invoices and payroll. It’s the foundation for accounting.
Why are proper accounting and bookkeeping practices important for small businesses?
They’re key for managing money well, tracking spending and earnings, and making smart choices about growth and hiring. This helps small businesses do well.
How can a small business separate business and personal expenses?
Use a separate business bank account and a business credit card. This avoids mixing personal and business money. It makes tracking business expenses for taxes easier and limits personal risk from business debts.
How can accounting and bookkeeping software help small businesses?
These tools automate tasks like sending invoices and sorting expenses. They also reduce mistakes.
What are the benefits of creating a budget for a small business?
A budget helps analyze operations to cut costs and find growth chances. Businesses with budgets tend to do better financially.
Why is it important for small businesses to keep detailed records and receipts?
Good records boost a business’s success chances and are key at tax time for claiming deductions. IRS rules require keeping records for three years, but accountants suggest seven years.
What do small businesses need to know about sales tax laws?
Owners of ecommerce businesses should talk to an accountant or tax lawyer about sales tax. Laws vary by state, depending on if the business has a physical presence or sells online.
What are the key accounting tips for small business owners?
Important tips include keeping business and personal money separate, using software for bookkeeping, and making a budget. Also, keep detailed records, understand sales tax, manage cash flow, stay organized, and plan for taxes.
What are the differences between cash-based and accrual accounting?
Cash-based accounting records sales and expenses when paid. Accrual accounting records them when they happen. Accrual gives a longer view and is used by big companies and financial groups.
How should a small business set up a chart of accounts?
Create a chart of accounts with all your transaction types, sorted into categories like assets and expenses. This keeps everything organized and helps track finances.
How should a small business determine its fiscal year?
Choose when your fiscal year starts and ends, making sure it’s 12 months straight. Think about your business’s seasonality or if it matches the calendar year.
How can small businesses automate invoicing and billing processes?
Use software to automate invoicing and billing. Features like automatic invoices and payment reminders save time and improve efficiency.
What do small businesses need to know about estimated tax payments and deductible expenses?
Make quarterly tax payments if you’ll owe over
FAQ
What is the difference between accounting and bookkeeping for small businesses?
Accounting is about putting together a business’s financial info to understand its health and make smart decisions. Bookkeeping is the part that gathers all the financial data like invoices and payroll. It’s the foundation for accounting.
Why are proper accounting and bookkeeping practices important for small businesses?
They’re key for managing money well, tracking spending and earnings, and making smart choices about growth and hiring. This helps small businesses do well.
How can a small business separate business and personal expenses?
Use a separate business bank account and a business credit card. This avoids mixing personal and business money. It makes tracking business expenses for taxes easier and limits personal risk from business debts.
How can accounting and bookkeeping software help small businesses?
These tools automate tasks like sending invoices and sorting expenses. They also reduce mistakes.
What are the benefits of creating a budget for a small business?
A budget helps analyze operations to cut costs and find growth chances. Businesses with budgets tend to do better financially.
Why is it important for small businesses to keep detailed records and receipts?
Good records boost a business’s success chances and are key at tax time for claiming deductions. IRS rules require keeping records for three years, but accountants suggest seven years.
What do small businesses need to know about sales tax laws?
Owners of ecommerce businesses should talk to an accountant or tax lawyer about sales tax. Laws vary by state, depending on if the business has a physical presence or sells online.
What are the key accounting tips for small business owners?
Important tips include keeping business and personal money separate, using software for bookkeeping, and making a budget. Also, keep detailed records, understand sales tax, manage cash flow, stay organized, and plan for taxes.
What are the differences between cash-based and accrual accounting?
Cash-based accounting records sales and expenses when paid. Accrual accounting records them when they happen. Accrual gives a longer view and is used by big companies and financial groups.
How should a small business set up a chart of accounts?
Create a chart of accounts with all your transaction types, sorted into categories like assets and expenses. This keeps everything organized and helps track finances.
How should a small business determine its fiscal year?
Choose when your fiscal year starts and ends, making sure it’s 12 months straight. Think about your business’s seasonality or if it matches the calendar year.
How can small businesses automate invoicing and billing processes?
Use software to automate invoicing and billing. Features like automatic invoices and payment reminders save time and improve efficiency.
What do small businesses need to know about estimated tax payments and deductible expenses?
Make quarterly tax payments if you’ll owe over $1,000. Many business costs can be deducted from taxes, like rent and equipment. Keeping accurate records is key for claiming these deductions.
How can small businesses properly classify workers as employees or contractors?
Classify workers based on control over their work and finances. Employees work under the business’s control, while contractors work on specific projects. Wrong classification can lead to big IRS fines.
When should a small business consider outsourcing accounting to professionals?
Consider hiring professionals for complex or large businesses. They can reduce errors, ensure accurate records, find cost savings, and offer valuable financial advice.
,000. Many business costs can be deducted from taxes, like rent and equipment. Keeping accurate records is key for claiming these deductions.
How can small businesses properly classify workers as employees or contractors?
Classify workers based on control over their work and finances. Employees work under the business’s control, while contractors work on specific projects. Wrong classification can lead to big IRS fines.
When should a small business consider outsourcing accounting to professionals?
Consider hiring professionals for complex or large businesses. They can reduce errors, ensure accurate records, find cost savings, and offer valuable financial advice.