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The All-in-One Guide to Getting Started With Business Finances

10+ min read • Apr 09, 2021 • Jesse Sumrak

Finance experience is not a prerequisite for starting a business. Quite the contrary: 60% of small business owners aren’t confident in finance and accounting. Cash mismanagement is the second most prevalent reason for startup failure—but it doesn’t have to be that way.

You don’t need an MBA to manage your business’s finances effectively, nor do you need a full-time accounting department. You just need a helping hand, a little know-how, and a willingness to learn. 

Hey, you’re already showing a willingness to learn by reading a guide about finances—good on you! And, hopefully, you’ll have all the fundamental know-how you need by the time you’ve reached the bottom of the page.

This guide will walk you step-by-step through getting started with your business’s finances. From separating your business and personal finances to paying the right amount of taxes—on time—we’ll show you everything you need to know to become one of the 40% of small business owners who are confident in finance and accounting.

Let’s start with why this matters in the first place—then, we’ll move on to how to get started.

Why Bookkeeping Matters for Small Businesses

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Most businesses don’t fail because they lack money—they fail because they don’t manage their money appropriately. Whether it’s negative cash flow issues, pricing problems, or lack of financing, failure to manage business finances often leads to bankruptcy and closed doors.

Taking control of your finances starts with proper bookkeeping. Without accurate, up-to-date records, you won’t be able to set, push for, or meet your financial goals.

Bookkeeping and accounting matter. It’s as simple as that. But for credibility’s sake, here are some pretty convincing stats to back us up:

  • 30% of small businesses place accountants at the top of their list of trusted advisors.
  • Companies that use cloud-based accounting software have 15% year-over-year revenue growth.
  • 82% of small businesses use some form of accounting software, be it on-premise or cloud-hosted.
  • 90% of accountants say that cloud accounting and digital business processes will be the key differentiator among businesses in the near future.
  • 66% of companies in the UK are at risk due to the mismanagement of accounting documents.

Getting your financial ducks in a row is essential to surviving—and thriving—in today’s competitive business environment. Fortunately, getting started with your finances isn’t as difficult as you probably think.

Determine Your Financial Goals

Creating your business’s first financial plan can be dull and uninspiring, especially if you’re following some drab template you found on the internet. For the sake of getting started, let’s keep things simple, painless, and high-level.

Let’s figure out how to get you from Point A to Point B:

  • Where are you now? (Point A): What’s your business’s current situation? What are your assets, liabilities, threats, big ideas, and opportunities?
  • Where do you want to be? (Point B): Where would you like to see your business in 5, 10, or 15 years? When do you want to retire? What do you want retirement to look like? Do you want to sell your business eventually?
  • How do you get from Point A to Point B? (The Path): This is where you create budgets, cash flow forecasts, and business strategies to make your goals a reality.

Figure Out How You’ll Fund Your Business

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Whether you’re brand-new to the entrepreneurial life or you’ve been in business for years, how do you plan on financing your business now and in the future? Do you have a pile of cash on hand to fund operations or a rich uncle who believes in your dream—or will you need to secure a small business loan?

Let’s take a quick look at your options:

  • Debt financing: Secure small business financing through a term loan, business line of credit, credit card, or other loan option.
  • Equity financing: Trade ownership of your business for immediate capital.
  • Bootstrapping: Use your personal funds and (hopefully) sales generated through operations to grow the business.
  • Friends and family: Patient capital (or “love money”) comes from family and friends who want to help.
  • Crowdfunding: Harness the power of the internet and your community to raise funds for your business.

You don’t need to make any big decisions today. You might use a mixture of these financing methods over the life of your business—and that’s okay! It’s good to take a step back and consider all of your financing options every once in a while.

How to Start Managing Your Business’s Finances

Now we’ll get into the detailed processes of managing your business’s finances. This section will cover all the bookkeeping steps you should take to get organized, plan appropriately, and even pay your taxes.

Take Advantage of Bookkeeping Software

Please, stop using the spreadsheets and hard-bound leather ledgers—it’s 2021. Still, 69% of CFOs rely on spreadsheets to build financial reports. This outdated process makes things more complicated than they ought to be.

“The underlying factor is that the majority of legacy financial systems do not provide the business with the reports they need to be successful today,” says Mark Nittler, vice president of Strategy at Workday. “Businesses must rely on a mixture of spreadsheets, connections, and messy integrations to piece together data from disparate systems—a perfect storm for inaccuracy, cost, and a lack of business agility.”

Make things as simple as possible with a cloud-based bookkeeping tool like Lendio’s software. Bookkeeping software can track your expenses automatically, invoice your clients, generate reports, make payroll, cover taxes, and so much more.

Separate Your Business and Personal Finances

It might be easier to carry around a single piece of plastic in your wallet, but it’s much more difficult come tax time. Trying to distinguish which expense was for your home office and which was for the living room can be a nightmare—especially 10 to 12 months later.

From the get-go, separate your business and personal finances:

  1. Apply for an Employer Identification Number (EIN): Not sure if you need an EIN? If you check “yes” to any of these questions from the IRS, then you do.
  2. Set up your business entity type: Sole proprietorship, partnership, LLC—choose the business structure that makes the most sense for you.
  3. Open a bank account for your business: Separate your income and expenses, limit your personal liability, and empower customers to pay your business directly with a business-specific bank account.
  4. Secure a business credit card: Start building your business credit (and expand your working capital) so you can qualify for bigger, better loans down the road.
  5. Separate all your expenses: Keep business expenses on the business credit card and personal expenses on the personal credit card—don’t mix them. This will make tax season easier and help you claim valuable tax deductions.

Keep Meticulous Records from the Get-Go

You don’t need to be a bookkeeping pro, but it’s helpful to follow a few basic best practices. If you’ve signed up for a cloud-based bookkeeping solution, you can connect your bank accounts and credit cards to allow the software to import, track, and organize your expenses and income automatically.

You’ll need all of this data to create your business’s 3 key financial reports: profit and loss statement (P&L report), balance sheet, and cash flow statement. These reports provide critical information for analyzing and predicting your business’s performance—plus, they’re essential to securing equity financing and small business loans.

Create these reports on a monthly, quarterly, and annual basis. Store them somewhere safe to reference in the future—your bookkeeping software likely has a place for that.

Meticulously monitoring your finances will help prevent money from slipping through the cracks. It’ll help you stay on track of your invoices and spending—so there are no unwelcome surprises when you do your end-of-the-year audit.

Organize and Track Your Invoices

If your invoices are stuck in the limbo of spreadsheets, emails, and paper documents, you’re not alone. 27% of small and midsize businesses admit that they have a hard time creating and sending invoices. 49% find it challenging to follow up on late payments, and 46% find it challenging to get paid on time. Plus, 50% are paying for their invoicing solution.

That’s a lot of invoice management mistakes.

First, don’t pay for your invoice solution. When there are free high-quality invoicing solutions, like Lendio’s software, you don’t need to spend a single penny on your invoice management.

Simplify your invoicing by combining all of your processes onto a single platform. Bookkeeping software can help with the following:

  • Create custom-branded invoices for your business
  • Turn your estimates into invoices with just a few clicks
  • Add due dates to let your customers know when invoices need to be paid
  • Send 1-time or recurring invoices to your clients
  • Set up automatic follow-up email reminders
  • Sync your paid invoices directly into your software to see which payments are paid, pending, or late

Estimate and Pay Your Taxes

Taxes are one of the not-so-great by-products of owning a business. Yes, they make the world a better place by improving education, repairing roads, and the like—but they also eat from your business’s profits. 

In one survey, around 93% of small businesses overpaid on their taxes for several years. You’re likely already operating on thin margins, so don’t let your tax estimates—or lack thereof—make the struggle more real.

Tax obligations aren’t just something to think about when tax season rolls around—it’s something you should be thinking about with every transaction, payment, and business decision. Here are a few tips to help you stay on top of your taxes:

  • Pay quarterly estimates: Don’t wait until April to pay all your taxes. Your business is expected to make estimated tax payments throughout the year.
  • Take advantage of deductions and credits: Check available tax credits and tax deductions to make sure you claim everything possible. 
  • File on time: Late penalties are hefty and unnecessary—avoid them!
  • Consider hiring a professional: Professional accountants and bookkeepers know what they’re doing and will get your taxes done right.

Bookkeeping software often has tax assistant tools to make managing your taxes easier. For example, Lendio offers the following:

  • Tax checklist: Check off the boxes to ensure you have everything you need for a smooth tax filing.
  • Document organization: Keep all your 1099s and other tax documents in 1 secure, easy-to-access place.
  • Tax estimator: Determine your tax burden ahead of time to make sure you have the necessary money on hand.

Apply for Small Business Financing

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Now that you have all your finances nice and organized, it’s time to start building your credit. From the get-go, it’ll be challenging to secure a traditional loan through a bank—you’ll likely need to start small with an alternative lender and possibly a credit card.

Here are a few starter loans to consider:

  • Startup Loan: Startup loans are awarded based on your personal credit history—not the business’s—making this a fantastic financing tool for companies with little-to-no credit history.
  • Business Credit Card: Business credit cards generally have easier qualifications. Start swiping your card responsibly to build your credit score.
  • Accounts Receivable Financing: Turn your IOUs into cold, hard cash so you can avoid needing another loan when customers are behind on payments.
  • Merchant Cash Advance: Trade tomorrow’s earnings for immediate cash today. A cash advance isn’t a loan, per se, but it can get you the capital you need to avoid defaulting on a loan and damaging your credit.

These are great financing options, especially if you’re in a pinch. However, using these loans responsibly now can help you to qualify for more substantial financing in the future. For example, you may want to purchase a second location for your business or a brand-new shiny piece of equipment.

Bigger, Better Loans

Here’s the sort of financing you’ll be able to qualify for in the future:

  • Term Loan: A term loan grants you a lump sum of cash that you’ll pay back in predictable installments over a predetermined period. You’ll likely need to be in business for a couple of years with a proven revenue track record to qualify. 
  • Equipment Financing: Equipment financing gets you a loan to cover everything from forklifts and conveyor belts to food trucks and commercial ovens. You’ll typically need to be in business for at least 12 months with a credit score of 650 or higher to qualify.
  • Business Line of Credit: A line of credit gives you working capital to use on pretty much anything related to a business expense. You’ll typically need to be in business for at least 6 months with a credit score of 560 or higher to qualify.
  • Commercial Mortgage: A commercial mortgage helps you buy, build, expand, or remodel a commercial property. You’ll likely need to be in business for a couple of years and have a credit score of 650 or higher to qualify.
  • Business Acquisition Loan: A business acquisition loan can be used to purchase an existing business or franchise. You’ll typically need to be in business for a couple of years to qualify.  
  • SBA Loan: There are various SBA loans to cover several business use cases, but they’re notoriously competitive. You’ll typically need a couple of years in business, a great credit score, and a proven revenue track record to qualify.

Consider Hiring a Professional

Managing your business’s finances is no easy task—that’s why accountants are paid the big bucks. However, they’re usually more than worth the money.

“I wish I did all of my taxes on my own instead of hiring a professional,” said no one ever.

Plus, accountants help with so much more than taxes. They’ve evolved their roles to become strategic decision-making partners:

  • Business plans: Accountants will use projections, cash flow forecasts, and financial reports to help you create realistic plans for your business.
  • Legal and compliance advice: Accountants understand legal structures, compliance regulations, and more. They can help you choose the best entity type for your business and ensure you’re complying with all federal and state laws.
  • Invoice management: While accountants have evolved to become strategic partners, they’re also capable of executing day-to-day bookkeeping tasks like invoice management and expense tracking.
  • Audits: If the IRS decides to audit your business, you’ll need an accountant to lead your business through the auditing process.
  • Business loan applications: Just having an accountant on your team can influence a lender to be more willing to lend to your business. Accountants can help generate all the numbers, projections, and reports that lenders want to see before they’ll hand you favorable rates and terms.

And that’s just the tip of the iceberg. Accountants are no longer number crunchers quarantined to the annex—they’re indispensable financial advisors.

Start Managing Your Finances

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The best time to get your finances in order was yesterday. Don’t wait to get organized—the second-best time to start is now. Follow these tips to start managing your finances like a boss.

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Jesse Sumrak

Jesse Sumrak is a Social Media Manager for SendGrid, a leading digital communication platform. He's created and managed content for startups, growth-stage companies, and publicly-traded businesses. Jesse has spent almost a decade writing about small business and entrepreneurship topics, having built and sold his own post-apocalyptic fitness bootstrapped startup. When he's not dabbling in digital marketing, you'll find him ultrarunning in the Rocky Mountains of Colorado. Jesse studied Public Relations at Brigham Young University.