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10 Tips for Managing Small Business Finances

July 28, 2023
Bill Kimball

After all, that extra capital can often go a long way in helping your business grow. You want to ensure that your business and personal finances are in good shape. Although tracking your receivables is essential for smart money management, receiving payments is even more important.

If you need to keep costs low, consider outsourcing to someone who can spend a couple of hours a month reviewing your DIY bookkeeping and providing strategic advice. As your business grows, you can always scale up their services to get help with payroll, inventory, cash flow management and more. Even if you aren’t required to separate business and personal funds, doing so is critical to money management. Plus, business bank statements are useful for tracking profitability, reconciling your books, and monitoring spending. Every business owner has a client that is consistently late on their invoices and payments.

When monitoring spending, you should also factor in uncashed checks. When you write a check, the recipient doesn’t need to cash it right away. If you forget to monitor spending, you could end up with an overdrawn account and overdraft fees. Be sure to factor in the fact that people and other companies are often late with payments, so if you want to receive payment within a month, make your payment terms 14 days. Small businesses are usually founded by entrepreneurs who have a unique vision and a passion that drives them to work late hours, take chances and believe in what they’re doing. With that in mind, this guide is going to go over a few good tips to help you successfully manage the finances of your small business and stay on track.

A loan can help resolve cash flow problems, allow you to purchase essential business equipment and provide growth opportunities. There are many strategies for preparing financial statements for a small business. Generally accepted accounting principles, known as GAAP or “Gap,” provides a common a way to standardize financial reporting using the accrual method. The Financial Accounting Standards Board (FASB) maintains GAAP in the United States.

This could be a machine breaking down, your revenue slowing down, property taxes increasing, suppliers adjusting their prices, and more. Another important thing to keep in mind is the importance of keeping a cash reserve. This is simply a little bit of extra cash that you keep around, just in case your business needs it for something. Analyzing your profit and loss statement can help you determine which aspects of your business are profitable. Investors and lenders also review your profit and loss statement when deciding whether to invest or lend to you. How you pay yourself depends on how your business is structured, so talk to your accountant or do some research into taking a salary versus a draw.

You can pursue payments by sending out invoices and late notices to customers. And if your business needs money earlier than the due date, you can offer an early payment discount. Another important part of managing your finances is monitoring your spending to ensure you aren’t going overboard and putting your company at risk. Perhaps the best way to monitor your spending as a business is to create a budget. A budget will show you exactly how much you are spending every month, so there are no shocks or surprises. With a clear picture of your business finances, consider whether you want or need a small business loan.

Having solid money management skills in your business is just as important as keeping your sales numbers high. It isn’t easy to do everything independently as a business owner, and many business functions can be outsourced. However, it would help if you always were cognizant of the financial health of your business. This amount should be sufficient to cover state and local income taxes, as well as self-employment taxes (however, your amount may vary, so be sure to check with your tax advisor).

A CPA will typically cost more than online services, but can normally offer more tailored service for your specific business needs. A bookkeeper can provide basic day-to-day functions at a lower cost, but won’t possess the formal accounting education of a CPA. For example, let’s say you’re deciding whether to add outdoor seating for your sausage themed restaurant, Haute Dog. You estimate outdoor seating would add $5,000 in extra profit from sales each year. But, the outdoor seating permit costs $1,000 each year, and you’d also have to spend $2,000 to buy outdoor tables and chairs. Your cost-benefit analysis shows that you should add outdoor seating, because the new benefits ($5,000 in new sales) outweigh the new costs ($3,000 in permitting and equipment expenses).

What is financial management for small business owners?

Often, your small business is successful because of your expertise in making your product or providing your service. Unfortunately, you might not be an expert at the other important parts of running a business, such as managing finances. If you don’t have a lot of experience with managing business finances, it can be a challenge, but it’s also crucial to the survival of your business.

  • How you pay yourself depends on how your business is structured, so talk to your accountant or do some research into taking a salary versus a draw.
  • My friends over at Crazy Egg did a comprehensive analysis of several popular accounting software programs.
  • This can come in handy with hiring another employee or an independent contractor.
  • This is what the short-term savings account mentioned in tip #1 is for.
  • However, without the influx of capital you obtain from loans, you may face substantial challenges when trying to purchase equipment or grow your team.
  • One of the first financial decisions you need to make in your business is choosing between cash and accrual basis accounting.

Money management isn’t just about accounting, nor does it have to be boring. Money management is about creating wealth in your business to transfer that wealth to yourself and increase your net worth as a small business owner. Not only does it help you see how much you are spending, but also where that money is going.

Plus, your accountant will be happier to get tidy business financial statements than a box of receipts at tax time. The most important step for any business owner is to educate themselves. In addition, organization is a major component of sound money management. Don’t be afraid to consult a professional, but make sure you have a handle on the day-to-day management of your business’s finances, as well as a plan for the future.

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Get up and running with free payroll setup, and enjoy free expert support. A budget also forecasts the amount of revenue your business will receive. If you find that your revenue is lower than budgeted, find ways to cut expenses and increase income. Record when payments are due and set reminders so you don’t fall behind.

  • A CPA will typically cost more than online services, but can normally offer more tailored service for your specific business needs.
  • While keeping cash reserve is good, don’t be afraid to borrow money, either.
  • Nearly half (42%) of small business owners report that handling cash flow is challenging.
  • Another important thing to keep in mind is the importance of keeping a cash reserve.
  • Perhaps the best way to monitor your spending as a business is to create a budget.
  • Or, are you constantly running out of goods that are in demand, causing you to turn away customers?

If any of those dates fall on a weekend or holiday, the deadline shifts to the next business day. Before the end of the year, you might consider purchasing tax-deductible items (e.g., supplies) so you can claim them on your tax return.

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For example, you wouldn’t want to keep this in a risky investment. Of course, budget only works if you put in the effort to keep it current and updated, so make sure to stick with it. You can budget manually, but it is often better to use a piece of budgeting software to be able to enter and check things quickly, and from any device. There are many options out there, and many of them are affordable enough for businesses of all shapes and sizes to try out. Make sure to do your research on the different options, and consider trying them out to see which works the best for your needs. If you choose to keep paper records, then consider buying a filing cabinet or pretty file box.

how to manage money in a small business

Debt funding comprises various traditional loans that require interest payments, whereas equity funding comes with fewer financial risks but requires you to cede more control to other parties. Equity funding, unlike debt funding, does not always require repayment if your business fails. However, you will likely have to grant your funders a seat at the decision-making table. Venture capitalists, angel investors and equity crowdfunding are all forms of equity funding. To learn more, read our guide to the difference between debt and equity financing.

It is important to remember that business finances aren’t just about your earnings; they’re also about how you spend your money and where you get it. When it comes to the latter, you should understand the two main funding categories below. Track how much inventory you have in your business to avoid crossing the fine line between having too much inventory and not having enough. Record inventory purchases and sales in your books and spend time monitoring how much you have on hand before ordering more. Do you order too much inventory, only to have it collect dust in your storage room?

Start with the required financial documents

Measuring expenditures and return on investment (ROI) can give you a clear picture of which investments make sense and which may not be worth continuing. Deborah Sweeney, CEO of MyCorporation, said small business owners should be mindful of where they spend their money. As your company grows, you may want to purchase more commercial real estate, acquire additional insurance policies and take out more loans to facilitate these pursuits. With poor business credit, getting approval for these transactions and acquisitions may be more difficult. To help you remember accounts receivable, record them in your books.

how to manage money in a small business

But a part of business success that often gets underrated is the importance of managing your finances. Sure you could keep everything in a spreadsheet, but that might get unwieldy. There are a lot of free and low-cost accounting programs available and they will save you headaches down the road. QuickBooks, Wave, Zoho Books, Xero, and FreshBooks are a few examples of the best apps for small business owners. When I was a banker, we always encouraged our small business customers to establish a credit line before they needed it. Remember, you don’t have to use that credit card or credit line until you need it.

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Consider hiring a certified public accountant (CPA), bookkeeper, or using an online service. Here are a few things you should do as a small business owner to stay on top of your finances. By looking at current expense areas and amounts, you can scale back and eliminate frills. You can also decrease expenses by shopping around for new vendors.

This will help you to focus your efforts and provide a numerical benchmark for projecting your cash flow in the near future. While keeping cash reserve is good, don’t be afraid to borrow money, either. Improperly managing your finances can often spell the end of your business, and ultimately lead to failure. You need to have a financial plan and strategy, always be aware of how much you are bringing in, and ensure you are always prepared for tax time. Businesses often use either the accrual or cash methods of recording purchases.

It’s easy to use your business credit card, debit card, or checks to cover small expenses. A little lunch for the staff here, a new coffee machine for the breakroom there… But small expenses add up. If you don’t keep an eye on your spending, you could be fitted with a sizeable bill that you aren’t prepared for. Failing to wisely manage money can lead to problems like making late payments, running out of money, and not collecting on your accounts receivable. As business owners, there are many tax savings opportunities available to you. It is worth investing in the guidance and advice from a tax professional to ensure you are optimizing your tax-saving strategy.

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This is a requirement if your business is organized as an LLC or corporation, but you really need to do it if even if you are a sole proprietor. Every business has to pay federal income taxes on business income. How you pay those taxes and the tax rate you pay depends on your business structure. There will always be business issues that need to be addressed today, but when it comes to your finances, you need to plan for the future. “If you’re not looking five to 10 years ahead, you are behind the competition,” said Tina Gosnold, founder of QuickBooks specialist firm Set Free Bookkeeping.