Let’s face it—managing a small business takes work. Between managing employees, overseeing marketing and advertising, and ensuring you have free time outside your job, handling finances on top of everything can be tough. But, managing your small business finances allows your company to thrive—and makes your business less likely to fail. If you’re feeling overwhelmed and are unsure where to start, below are 10 tips for managing small business finances:
1. Be sure to pay yourself
If you own a small business, it can be tempting to put all your money into daily operations. After all, the extra capital can go a long way in helping your business’s finances grow. But, you want your business and personal finances to be in good shape, so it’s crucial to pay yourself. There are two main ways to pay yourself as a business owner: salary and owner’s draw.
With salary, you pay yourself a regular salary as if you’re an employee, withholding taxes from your paycheck. This is required for businesses structured as S-corporations, C-corporations, or limited liability companies (LLCs) taxed as a corporation. With owner’s draw, you draw money from profits on an as-needed basis. Paying taxes up front every time you draw is not required, but you should set aside money regularly to budget for your tax bill.
Pay yourself a fixed percentage of your business’s net profit, as shown on your profit and loss statement, after accounting for operational expenses. This ensures you meet business obligations first, like paying employees.
2. Separate personal and business banking accounts
One crucial element to managing small business finances is to separate personal and business accounts. Separate accounts make it much easier to oversee funds, manage tax payments, and prepare financial statements accurately. It’s best to open a business checking account and a short-term savings account, like a business savings account or money market account. You can even use a Business Account Comparison Tool to help you along in your decision process.
3. Use a business credit card
Similarly, you need a business credit card to keep your daily purchases separate from business purchases. Business credit cards simplify tracking business expenses, reduce accounting errors, and separate personal and business finances. You don’t need to sift through your credit card statement to determine which purchases were personal or business related. It’s also easier to get records together if you’re audited.
Business credit cards don’t sit on your credit report, either. Your business line of credit sits separately from your personal credit line, so your utilization rate doesn’t affect your credit score. However, most applicants experience a two- to five-point hit on their credit score because financial institutions use your credit report to assess creditworthiness. Another thing to keep in mind is if you default on a business credit card, the issuer can come after you, as your credit guarantees those cards.
4. Create a realistic budget for business expenses and profit goals
Having a budget helps account for every cent that comes in and out of your business. To start your budget, make a list of expected monthly income sources, like any payment made in exchange for a product or service rendered. Next, make a list of expenses incurred, such as inventory, payroll, insurance premiums, taxes, overhead, or debt payments. Having a budget and regularly reviewing financial statements like profit and loss statements and balance sheets will help you reach business goals and anticipate operational changes. There are various budgeting styles in business, so it’s best to determine which method works best for your business.
Organize and prioritize expenses
Dividing your expenses by categories can not only help you keep track of your spending, but it can also help maximize your deductions when it’s tax time, as well as reduce accounting errors. Using a financial management software like QuickBooks or Expensify is one of the easiest ways to track your expenses. They often have pre-populated categories for common business expenses, which is helpful if you’re unsure where to start. Some popular business expense categories include:
- Operating expenses: Day-to-day operating expenses like utilities, office supplies, rent, and maintenance
- Payroll: Salaries, wages, employee benefits, and payroll taxes
- Marketing and advertising: Costs related to promoting your business, like social media ads, website development, print materials, and business cards
- Capital expenses: Larger purchases like equipment, vehicles, and other property that depreciates over time
Identify tax-deductible expenses to maximize your tax benefits, and group your transactions based on their function within your operations. Ensure proper documentation for each expense for accounting purposes.
5. Monitor cash flow to ensure enough cash for day-to-day operations
It’s critical to understand where your money goes when running a business. Poor cash flow management or poor understanding of cash flow is one of the biggest causes of business failure. You must have tight expense controls—and if your bills exceed the cash you have on hand, you have an issue with cash flow. Create a cash flow statement to analyze your financial health and update it monthly. This will help avoid unnecessary bank account overdrafts or overspending. If you use Excel, there’s a free cash flow template to help you get started. When cash flow is tight, consider reviewing options like small business loans or debt financing to ensure you have enough cash on hand for day-to-day operations.
Cash flow forecasting
Cash flow forecasting (also known as cash flow projection) estimates your business’s cash inflows and outflows over time. It’s an important practice that helps businesses avoid cash shortages. Cash flow forecasting isn’t a perfect method—no one can predict the future—but it helps business owners anticipate potential cash shortages, plan for growth, and make informed financial decisions.
Here’s a brief overview of how it works:
- Estimate incoming cash: List all expected sources of revenue, like sales, customer payments, loans, or investments. If you have recurring customers or contracts, you can use past data to predict future income.
- Project outgoing cash: Identify all expected expenses, including rent, payroll, supplier payments, loan repayments, and taxes. Also include irregular costs like equipment upgrades or seasonal expenses.
- Calculate net cash flow: Subtract your projected expenses from your projected income. If the result’s positive, good news: your business is generating more cash than it’s spending! If the result’s negative, then you may need to cut costs, increase revenue, or secure more funding.
- Monitor and adjust: Cash flow forecasting isn’t a one-time task. Regularly compare your projections to your actual cash flow and adjust as needed to keep your business on track.
6. Practice good bookkeeping techniques
Bookkeeping allows business owners to keep track of all financial transactions conducted within a certain period (usually monthly). Practicing good bookkeeping techniques allows you to keep an accurate track of your income and costs. You can bookkeep using a traditional ledger book or accounting software like QuickBooks or Xero. There are free options available, too. Before deciding on an accounting program, think about your operations. Figure out if you need to send invoices, whether you want mobile access or access for multiple users, credit card processing integration, and more.
7. Set money aside for taxes
Setting money aside for taxes will help you save big in the long run. There are a few tips and tricks for determining how much money you should set aside for taxes. You’ll need to pay federal taxes, including self-employment tax and income tax. These are paid quarterly to the IRS. If you hire employees, you’ll also have payroll tax. Depending on your business, you may have to pay state and local taxes, like sales tax, franchise tax, or property tax. You can learn more about state-specific taxes by visiting your state’s tax authority website.
A general rule is to set 30-40% of your business income aside to cover federal and state tax payments, which simplifies preparation during tax time. You can put money into your short-term savings account for your small business taxes as often as you want. Tax obligations for businesses vary, so consult your CPA to determine how much you should set aside. Regular tax payments can also prevent common financial mistakes that arise when taxes are overlooked.
8. Don’t be scared of loans…
Loans can be intimidating, but they can boost your business when used responsibly. Without an influx of capital, it can be hard to purchase equipment or grow your product line. Small businesses are also eligible for SBA loans. SBA loans help small businesses grow by allowing borrowers to obtain long-term operating capital at a reasonable cost, including longer terms or no prepayment penalties. They can be used for business start-ups, expansion, equipment purchases, and more.
9. But keep good business credit
While you shouldn’t be afraid of loans, you should keep your business credit in good standing. As your business grows, you may want to purchase more commercial real estate or equipment or additional insurance policies. Getting approved is difficult with poor business credit. Be sure you pay off debt funding as soon as possible. For example, don’t let business credit cards run a balance for more than a few weeks or take out loans you can’t afford. Only seek funding you can easily and quickly repay.
10. Schedule time to stay organized
One of the easiest ways to manage your small business finances is to stay organized. Set aside time each week or month to keep finances in line. This includes adding data to any financial software you use, scanning receipts, filing paperwork, or invoicing. Take 15 minutes to an hour each week to ensure your finances are in line.
You can even set aside time to update your own finances, as you want both your business and personal finances to be in order. For example, you can set aside 30 minutes one day of the week to take care of any financial housekeeping for your business. On another day, you can work for 30 minutes on any personal finance issues.
Monthly financial check-in routine
Each month, you can have a deeper check-in on top of your weekly review. Here’s a simple routine to follow each month:
- Review income and expenses: Compare your actual revenue and expenses against your budget or cash flow forecast. Look for trends, unexpected costs, or areas where you can cut back.
- Update your cash flow forecast: Adjust your cash flow projections based on recent financial activity. This will help you anticipate upcoming expenses and plan for slower months.
- Reconcile your bank accounts: Cross-check your bank statements with your accounting records to ensure everything’s a match. This helps catch errors, missing payments, or fraud.
- Check invoices and payments: Follow up on any outstanding invoices and make sure you’re paying your own bills on time.
- Assess profitability: Look at your profit margins and overall financial health. Are your costs too high? Are you pricing your services correctly?
- Set financial goals: Based on your review, set one or two financial goals for the next month, like increasing revenue, reducing expenses, or improving cash flow.
- Plan for taxes: Set money aside for taxes to avoid surprises later. If applicable, review estimated tax payments to ensure you’re on track.
Bottom line
We know that managing your small business takes time, effort, and money. With these financial tips, we hope managing business finances including maintaining your business assets and handling business expenses seems less daunting.
We believe small businesses are the pillars of our community—that’s why we offer a comprehensive suite of products aligned to your business needs, from business checking and savings accounts to treasury management solutions and commercial loans. Whether you’re just getting started or are an established business, our experts are here to help.
