10 Best Tips for Managing Small Business Finances

small business owner holding a piggy bank
9 Financial Tips for Small Businesses to Boost Growth

Starting a small business can be exciting but comes with its fair share of challenges. One of small business owners’ most significant challenges is managing their finances. Financial management is integral to running a business; if you neglect it, your business may suffer. This article will share nine powerful tips for managing small business finances to succeed.

Tip for Securing Your Small Business Finances

As a small business owner, managing your finances is crucial for success. It’s essential to take certain actions to stay in control of your finances. Here are some important steps you should follow.

01. Pay yourself

business person holding cash representing pay yourself concept of small business finance
business person holding cash representing pay yourself concept of small business finance

It’s not uncommon for small business owners to focus on growing their business instead of paying themselves right away. But it’s important to understand why paying yourself from the beginning, even if it’s a small amount, like a few hundred dollars a month, can be beneficial. Firstly, it helps you cover your personal expenses and save money, especially if the business doesn’t do well.

Many small business owners, especially in the beginning, tend to overlook paying themselves because they think it’s less important than paying others involved in the business. Remember, you’re a valuable part of the business and should be compensated fairly like anyone else.

02. Separate business and personal finances

When starting a small business, many people use their personal credit cards for business expenses and mix business revenue with their personal bank accounts. Although it may seem convenient initially, this approach can lead to significant complications.

For instance, the IRS permits business owners to deduct expenses directly related to their business, such as travel and supplies. However, you need proper documentation to support these deductions. If the IRS reviews your tax return and finds a lack of clear records distinguishing between personal and business transactions, you could miss out on those deductions.

Opening a dedicated business bank account is advised to avoid such complexities. Look for one that offers benefits like free checks, no monthly fees, and unlimited transactions. You can easily track and document your business-related financial activities by maintaining separate accounts.

Understanding your company’s finances comprehensively, staying up-to-date with your accounting tasks, and maintaining accurate financial records is vital. Keeping your personal and business accounts separate ensures the financial stability of your business before making any investments. When assessing potential internal risks, consider both market factors that can be anticipated and external factors that might threaten your company.

 03. Invest in growth

Saving money and exploring growth opportunities are essential for your small business’s prosperity and financial well-being. Investing in the future shows you’re committed to growth, innovation, and attracting talented employees.

By dedicating funds to improve your services, customers will notice and appreciate the enhanced level of care. Similarly, investing in your company and supporting your employees’ career development will make them feel valued and motivated. Ultimately, these actions will create more value for your business than spending all your profits on personal matters.

04. Get The Right Financial Documents In Order

get the right documents in order for small business finances, cartoon style illustration
get the right documents in order for small business finance

To get a clear picture of how your business is doing financially, it’s essential to look at financial statements. These statements give you helpful information about the financial health of your small business. You should know three primary financial statements: the balance sheet, profit and loss statement, and cash flow statement.

  1. Balance Sheet: The balance sheet presents a snapshot of what your business owns (assets) and owes (liabilities) at a specific time. It also reveals your equity, which is the remaining value if you sold all assets and settled all debts. By analyzing the balance sheet, you can determine if your business can cover expenses and assess your ability to acquire assets or obtain loans.
  2. Profit and Loss Statement: Also known as the income statement, this document showcases your business’s revenues, expenses, and overall profit or loss over a specific period, such as a month, quarter, or year. Analyzing the profit and loss statement helps identify profitable aspects of your business. Additionally, investors and lenders review this statement to assess whether they should invest in or lend to your business.
  3. Cash Flow Statement: The cash flow statement summarizes the cash flow into and out of your business over a specific timeframe. It provides insights into available cash for bill payments and business growth. By analyzing this statement, you can effectively make informed decisions about managing your cash flow.

05. Have a good billing strategy

You may encounter clients who consistently pay their invoices late, causing financial challenges. It’s essential to manage your small business finances well, including maintaining a healthy cash flow on a day-to-day basis. If you’re having trouble getting paid by specific customers, it’s time to think creatively about how you handle billing.

Instead of repeatedly sending invoices and making phone calls to customers who pay late, you can try a different approach. It involves changing the payment terms to “2/10 Net 30.” Here’s what it means: If the customer pays the invoice within 10 days, they get a 2% discount off the total bill. If not, the full payment is due within 30 days.

06. Follow Best Accounting Practices

When starting your business, one of the key financial decisions you’ll face is choosing between cash-basis and accrual-basis accounting.

Cash basis accounting is straightforward and records revenue when you receive money and expenses when you pay out money. On the other hand, accrual basis accounting is more detailed, tracking revenue when earned and expenses when incurred, regardless of cash flow.

Use accounting software.

Next, consider using accounting software to streamline your financial tracking. While some businesses manage with manual methods, accounting software can simplify the process and provide tidy financial statements for tax purposes. Look for software that offers cloud access, reliable customer support, integration options, and automation features like invoicing and expense recording.

Hire an accounting professional.

Working with an accounting professional, even on a part-time or outsourced basis, can also be beneficial. They can assist with business planning, entity selection, accounts payable, and applying for business loans. As your business grows, you can expand their services to cover payroll, inventory management, cash flow, and more.

07. Maintain a good business credit

Your business credit score significantly impacts various aspects, such as qualifying for business credit, securing contracts, and determining the rates for business insurance. Regularly checking your business credit report is essential.

Obtain a free DUNS number from Dun & Bradstreet to establish your business credit. Utilize this number when applying for business credit cards or trade credit accounts, and ensure timely payments to demonstrate your reliability to the business credit bureaus.

It’s important to note that not all credit card companies and vendors report payments to the business credit bureaus. If you have consistently made on-time payments that haven’t been reported, consider enrolling in Dun & Bradstreet’s CreditBuilder product. This service will actively gather your vendor payment history and incorporate it into your PAYDEX business credit score.

Maintaining a good business credit score is vital as your company expands. It allows you to pursue opportunities such as acquiring more commercial real estate, obtaining additional insurance policies, and securing loans. However, poor business credit can hinder approval for these transactions and acquisitions.

To preserve a favorable credit standing, prioritize paying off your debt funding promptly. For instance, avoid carrying a balance on your business credit cards for extended periods. Additionally, be cautious when taking out loans and ensure that the interest rates are manageable within your financial means. Only seek funding that you can easily repay promptly.

08. Pay business taxes

pay business taxes happy business owner paying tax cartoon illustration
pay business taxes

Every business is required to pay federal income taxes on its business income. The method and rate of tax payment depend on the structure of your business.

To ensure you can meet your tax obligations, it’s wise to develop a habit of setting aside a portion of your income each month. This will give you the necessary cash to make estimated tax payments. These payments are typically due on four specific dates throughout the year:

  • April 15
  • June 15
  • September 15
  • January 15 of the following year

It’s important to note that if any of these dates fall on a weekend or a holiday, the deadline is shifted to the next business day.

If you find saving for your quarterly estimated tax payments challenging, you can consider making monthly payments instead. According to Michele Etzel, the owner of Bayside Accounting Services, treating tax payments as a monthly operating expense can help ensure a smoother process. You can integrate tax payments into your regular financial routine by breaking them down into manageable monthly amounts.

09. Explore small business loans

It’s not just about how much you earn, but also how you spend your money and where you obtain it. Let’s look at the two main funding categories you should know about.

  • Debt Funding: Debt funding involves taking a loan that your company must repay with interest. It allows you to quickly access capital that might otherwise take weeks or months to obtain. Examples of debt financing include bank loans, government loans, merchant cash advances, business credit lines, and business credit cards. It’s crucial to remember that even if your business fails, you are still responsible for repaying the debt.
  • Equity Funding: Unlike debt funding, equity funding does not always require repayment if your business fails. However, you may need to give your investors a say in decision-making in exchange for funding. Venture capitalists, angel investors, and equity crowdfunding are common forms of equity funding.

Once you understand your business finances, you can consider whether a small business loan is necessary or beneficial for your situation. A loan can help address cash flow issues, facilitate essential equipment purchases, and provide growth opportunities.

To qualify for a small business loan, having organized accounting records and accurate, timely financial statements is crucial. Depending on the lender’s requirements, you may also need additional documents such as a business plan, reports showing the financial health and credit risk of your business (such as accounts receivable and accounts payable aging reports), collateral, and copies of business licenses, articles of organization, and contracts with vendors or customers.

10. Follow good financial habits and Practices

Implementing internal financial protocols is crucial for safeguarding your business’s financial well-being. Even simple measures like dedicating regular time to review and update financial information can significantly impact. You can minimize fraud risks and other potential financial threats by staying on top of your finances.

Managing the financial aspects of a small business can be challenging, considering time constraints, limited resources, and technological limitations. However, every small business owner should prioritize implementing internal controls to maintain financial integrity. This becomes especially important when you have employees, as weak internal controls can create employee fraud or theft opportunities. Moreover, non-compliance with relevant laws can lead to legal complications.

By establishing and maintaining internal financial protocols, you demonstrate a commitment to protecting your business’s financial health and ensuring that you’re operating within legal boundaries. It’s a proactive step towards mitigating risks and building a solid foundation for your business’s long-term success.

Bonus Tip: Utilize Technology

use technology AI robot working for a small business finances sector, cartoon illustration
AI robot working for a small business

Technology can help streamline your business operations and improve efficiency. Which can reduce your operational costs. Consider investing in software or tools to automate tasks, manage inventory, and track sales. This can reduce errors and save time, allowing you to focus on growing your business.

You can further boost your business growth by leveraging the power of AI technology. AI can help you analyze data, predict trends, and make informed decisions to optimize your business operations. 

Consider implementing AI-powered solutions such as chatbots for customer service, predictive analytics for sales forecasting, or automation tools for repetitive tasks. By using AI technology, you can unlock new levels of efficiency and productivity, allowing you to reduce costs and focus on the core aspects of growing your business.

The importance of small business finances management

To thrive as a business owner, Managing your business finances is vital to your success. It forms the bedrock of your operations, allowing you to make informed decisions, seize opportunities, and navigate potential risks. By prioritizing the management of your business finances, you establish a solid foundation for stability, growth, and resilience. This involves keeping a close eye on your cash flow, tracking expenses, and understanding financial statements in simple terms. It also means having a clear plan for the future, ensuring that you can meet your financial goals and secure the longevity of your business.

Diligent financial management plays a pivotal role in safeguarding the financial health of your business. It empowers you to stay organized, make sound financial choices, and avoid pitfalls that could lead to failure. While seeking guidance from financial professionals is valuable, it is equally crucial for business owners to have a firm grasp of day-to-day financial management. Taking charge of your business’s financial affairs and charting a strategic course set the stage for success and ensure a prosperous future.

Conclusion

Managing small business finances can be challenging, but by following essential steps like paying yourself, separating business and personal finances, investing in growth, and using Technology.

You can stay in control of your finances and ensure the economic well-being of your business. Implementing internal financial protocols and controls is also essential to safeguard your business’s financial integrity, minimize fraud risks, and comply with relevant laws. By prioritizing these actions, you set a solid foundation for the long-term success of your business.

Frequently Asked Questions (FAQs)

Why should I separate business and personal finances?

Mixing business and personal finances can lead to complications, especially regarding tax deductions and maintaining clear financial records. Opening a dedicated business bank account allows easier tracking and documentation of business-related transactions.

What are the essential financial documents I should know?

The three primary financial statements are the balance sheet (assets, liabilities, and equity), profit and loss statement (revenues, expenses, and profit or loss), and cash flow statement (cash inflows and outflows). These statements provide valuable insights into your business’s financial health.

How can Technology help in managing business finances?

Technology can streamline operations, reduce costs, and enhance efficiency. You can automate tasks, track sales, analyze data, and optimize decision-making using accounting software and AI-powered solutions.

What are the best accounting practices for small businesses?

Choose between cash-basis and accrual-basis accounting methods, consider using accounting software for streamlined financial tracking, and seek assistance from accounting professionals to ensure accuracy and compliance.

How should I handle business taxes?

Set aside a portion of your monthly income for quarterly estimated tax payments, ensuring you meet your tax obligations. Consider making monthly payments or treating tax payments as a regular operating expense to ease the process.

Should I consider small business loans?

Depending on your business needs, a small business loan can address cash flow issues, facilitate necessary purchases, and provide growth opportunities. Organized accounting records and accurate financial statements are essential for loan qualification.

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