Business Finance

Tips for Managing Your Small Business Finances

Jan 25, 2023 • 10+ min read
Table of Contents

      Running a small business comes with many challenges and responsibilities. Yet one of your most important duties as a small business owner is managing your company’s finances. 

      According to the Score Foundation, powered by the U.S. Small Business Administration (SBA), 82% of failed small businesses go under due to cash flow problems. Those cash flow issues are often symptoms of deeper financial issues that stem from poorly managed business finances in a number of different areas. 

      It’s critical to pay close attention to details like your company’s budget, expenses, cash flow, return on investments, tax strategy, investments in growth, and more. Staying on top of these important financial matters and others can help you maximize profits and detect when financial challenges (like a shortage of capital or a cash flow crunch) could be on the horizon. 

      Read on for 11 tips to help you manage your small business finances.

      1. Improve Your Financial Literacy

      There are many ways to improve your financial literacy. A great way to start is by learning basic financial terms.

      Once you’ve built a solid foundation, learn how to read the four key financial reports below to monitor your business’ financial health.

      It’s also essential to understand the differences in bookkeeping vs. accounting and how to utilize each service in your business’ finances. Bookkeeping organizes and records your company’s financial data. Accounting uses that financial information to help you (the business owner) along with others (e.g., lenders and investors) make strategic business and investing decisions.

      2. Separate Personal and Business Finances

      It’s common for small business owners to intermingle personal and business accounts. According to the SBA, 46% of small businesses use personal credit cards. Yet even though using personal credit cards for business may be common practice, it’s still a risky bookkeeping mistake.  

      The best way to protect yourself and your business is to keep your personal and business finances completely separate from each other. You should open dedicated business bank accounts and business credit cards for your company and use only those accounts for business purposes. 

      This practice reduces bookkeeping confusion, makes it easier to budget, and can help you to develop your business credit rating. Maintaining separate finances might also help protect you from personal liability (aka “piercing the corporate veil”) if a creditor ever tries to sue your small business in the future. 

      3. Create a Budget

      Most small businesses must adhere to a strategic budget to succeed. Just as poor budgeting habits can lead to debt problems and financial shortages in your own household, failure to create a budget for your small business can lead to a host of financial issues for your company as well. 

      An effective business budget will consider all anticipated business expenses (fixed and variable costs) against expected revenue. This approach allows a business to gauge its financial standing at any given point. A well-planned budget can also empower a business to set realistic goals and create the motivation it needs to reach them.

      4. Track Expenses

      Once you create a budget, it’s essential to track your business expenses. To accomplish this goal consider recording and categorizing every purchase—from petty cash expenditures to recurring subscription fees to raw material purchases.

      Beware of falling into the “later” trap where expense tracking is concerned (e.g., “I’ll enter that receipt into my financial books later”). Instead, create a system that makes it easy to track purchases in real time or to enter purchases manually as needed.

      5. Monitor and Forecast Cash Flow

      Cash flow measures money moving in and money out of your business. As a small business owner, understanding your cash flow matters as much, if not more than, keeping tabs on your company’s total revenue.

      Consider the following scenario. Imagine you earned $50,000 in revenue during your first month of business—exceeding the goals you set. But what if you spent $100,000 that same month? When your company’s cash out exceeds its cash in, the story changes. 

      For small business owners, it’s vital to both monitor and forecast cash flow. Forecasting can provide you with financial wiggle room—helping you predict financial gaps in advance so you can take steps to prevent potential issues before they occur. 

      For example, forecasting could alert you to a need for extra capital next quarter. In this scenario you could attempt to secure business financing or try to entice your customers to pay their invoices early (perhaps by offering an early payment discount). Taking action in advance might help you avoid potential problems before they can occur in the first place. 

      6. Create a Tax Strategy

      As a small business owner, taxes are one of the many responsibilities you can’t afford to ignore. Yet with proper tax planning, it may be possible to reduce your tax obligations to the IRS by taking advantage of tax credits, write-offs, and tax deductions. 

      Tracking expenses can make it easier to claim all the tax deductions and credits available for your small business. For example, you may be able to use tracked business-related mileage and meals to reduce your tax bill. And you can use small business accounting software to keep tabs on potential write-offs when tax time rolls around as well.

      7. Build Good Business Credit

      Lenders rely on credit scores to evaluate the risk of their credit applicants. Good credit scores tell a lender that an applicant is more likely to repay the money they are asking to borrow as promised. Bad credit scores tell a lender that there’s a higher risk the applicant might default on their debts. Because credit scores help lenders predict risk, lenders often evaluate both personal and business credit scores when you apply for business financing. If your company is new you may not have had time to establish business credit scores yet. Thankfully, you may be able to qualify for certain types of business financing based on good personal credit alone. But if you work to also establish good business credit, it might increase your business financing options for the future.

      8. Utilize Business Financing

      Many small business owners invest personal funds in their startups and some ask friends or family members for a loan. But one of the top ways entrepreneurs finance their businesses is by seeking to secure outside financing. Unlike using personal investments or funds from loved ones, business financing has the potential to help you build your business faster and perhaps with less personal risk or stress. 

      There are many different types of business financing available. Check out our guide to finding and securing financing for help starting the research process.

      It’s also important to consider the timing of when you apply for business financing. Many entrepreneurs hold a mistaken belief that the best time to take out a loan or line of credit is when their business is short on cash. In truth, it’s typically better to apply for financing when your business is flush with funds. When your company is prospering, it’s a more appealing investment for lenders because they see from your financials that your business has the capacity to repay its debts. 

      If you’re concerned about the idea of going into debt, consider the following. Reaching your business goals often involves leveraging other people’s money. You can use the funds you borrow to hire new staff, expand office space, invest in new technology, and more. So, it’s important to at least consider whether embracing financing makes sense as part of your business strategy.

      9. Focus on Expenditures and ROI

      Business funding may come from many different sources. Yet whether those funds start out as personal investments, loans from family or friends, revenue your business generates, or business financing, it’s critical to spend those funds wisely.One way to make sure your business is getting the most bang for its buck is to focus on expenditures and return on investment or ROI. Track where your business is spending its advertising and marketing dollars, inventory funds, and more. Then measure the returns your business receives from those expenditures. If you find that spending in certain areas isn’t paying off, you can cut back or stop. At the same time, you can pour more money into areas that are producing better results.

      10. Invest in Growth

      Investing in the growth of your business is essential for its long-term success and survival. On top of any monthly payments you set aside for yourself as a business owner, consider earmarking funds for continuing education and future investments in your company as well. 

      For example, you might have plans to expand your business in the months or years to come—either into new areas, new locations, or both. Or perhaps you have plans to introduce new products or services, grow your customer base, hire additional team members, etc. Whatever your goals, it’s important to strive to achieve them. That may require a commitment for you and key staff members to participate in continuing education programs, attending industry events, and take advantage of the right investment opportunities. Depending on your growth-related business goals, long-term business loans might be worth considering as well.

      11. Set Up Good Financial Management Habits

      Financial management comes in many different flavors—from a more lenient system to one that tracks every penny spent in real time. Whatever business financial management strategy you opt for, be sure that you have one and that you use it on a consistent basis.

      Brushing up on financial management skills (including financial literacy skills, understanding cash flow, and learning to spot red flags in your financial reports) can help you launch your dream business. More importantly, good financial management habits can help you protect your small business so that it has a chance to last for many years to come.

      The Bottom Line

      Small businesses can face many financial obstacles, especially as startups. So, it’s wise for small business owners to follow the steps above and prepare themselves to navigate financial hurdles before they arise.

      With a long-term mindset and a close watch on company spending, small business owners may be able to provide their companies with a path to future growth and success. Working to build good business credit, invest in growth, and taking advantage of business financing opportunities may also be helpful along the way.

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      The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our bloggers or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything. The information provided in this post is not intended to constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.
      About the author
      Michelle Lambright Black

      Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. Founder of CreditWriter.com—an online community that helps busy moms take control of their credit and finances—Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many more.

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