Accounting

Starting a Business? Don’t Miss These Money Management Tips

Aug 11, 2021 • 8 min read
Man works on business finances. Has a laptop, calculator, and several paper reports at desk.
Table of Contents

      As a first-time business owner, it’s easy to get caught up in the excitement of starting your business and delay implementing a sound money management strategy.

      Luckily, money management isn’t complex—if you know the basics. Follow our tips and you’ll be well on your way to managing money wisely for your new business.

      The Meaning of Money Management

      What is meant by money management? According to the Santa Cruz Small Business Development Center’s guide “Financial Management for a Small Business”: “Financial management includes bookkeeping, projections, financial statements, and financing, which forms the foundation for reaching your goals through sound business decisions.”

      In simpler terms, money management means having an accurate picture of your company’s finances. It also means understanding how to use “money” (whether that is debt, assets, or inventory) to your business’s advantage.

      You already know that tracking your personal income and expenses allows you to save for retirement, pad a rainy day fund, and splurge guilt-free on concert tickets. Money management gives your business the same freedom and security.

      How Is Money Management Important?

      Money management strategies can help a business owner to:

      Without a money management strategy, it’ll be challenging to know when to modify your business procedures or celebrate your wins.

      What Are the Principles of Money Management?

      The basics of business money management include:

      • Financial literacy
      • Separating personal and business finances
      • Tracking expenses
      • Invoicing and handling debt collection
      • Using financing to your advantage
      • Having a tax strategy
      • Monitoring and forecasting cash flow
      • Reviewing financial statements

      Financial Literacy

      There are many ways to improve your financial literacy. You can start by learning basic financial terms.

      Once you’ve built this foundation, learn how to read the 4 key financial reports to monitor your business’s financial health:

      It’s essential to understand the differences between bookkeeping vs. accounting and how each will be utilized in your business’s finances. Bookkeeping keeps your financial books accurate and organized, while accounting uses that financial information to help you make strategic business decisions.

      Separate Personal and Business Finances

      Don’t make the common bookkeeping mistake of mingling personal and business accounts.

      Open business bank and credit card accounts to separate your business and personal finances. This reduces bookkeeping confusion, helps you to budget, and allows you to develop your business credit rating.

      Track Expenses

      Once you’ve separated your personal and business accounts, it’s time to track your business expenses. This means recording and categorizing everything—from your petty cash to subscription fees to raw material purchases.

      Don’t fall into the “later” trap (e.g., you’ll enter that receipt into your financial books later). The easier it is to track expenses, the more consistent you’ll be. Bookkeeping software like Lendio’s software can facilitate tracking your business expenses and help you to keep your books up to date.

      Invoice and Debt Collection

      Customers generally only pay upon receipt of an invoice. But invoicing tasks can be a time burden on business owners.

      Luckily, invoice management tools can:

      Occasionally, a customer may be late paying their invoice. With luck, a nudge or 2 will prompt payment—if it doesn’t, though, be prepared to send someone to collections. While this is a scenario everyone wants to avoid, sometimes it’s necessary to recover the money that is rightfully yours.

      Use Financing to Your Advantage

      You might start your business using personal funds. More likely, you’ll secure financing to launch and eventually expand your company. To sort through all the available financing options, check out our guide to finding and securing financing.

      If your grandmother’s voice is in your head saying “don’t spend more than you have,” consider ignoring it. Reaching your goals often means leveraging other people’s money, so it’s important to know how to embrace financing as part of your business strategy.

      Have a Tax Strategy

      The IRS wants its fair share, but you can reduce your tax bill with proper tax planning. For example, you could choose to defer income or group your expenses to minimize your tax bill at the end of the year.

      This is also where tracking expenses helps you to claim all the tax deductions and credits available for your small business. For example, tracked business-related mileage and meals can be used to reduce your tax bill.

      Monitor and Forecast Cash Flow

      Cash flow measures money in and money out of your business. As a new business owner, it’s important to understand cash flow is equally, if not more, important than revenue.

      Think of it this way: let’s say you exceeded your wildest dreams and earned $20,000 in revenue your first month of business. Sounds like a win, doesn’t it? But what if you spent $100,000 in that same month? Suddenly your cash out exceeds your cash in by a long shot.

      For small business owners, it’s vital to both monitor and forecast cash flow. Forecasting gives you wiggle room—it allows you to predict financial gaps so you can take steps to prevent an issue.

      Suppose you know you’ll need extra income next quarter. In that case, you could secure financing or entice your customers to pay their invoices early. An ounce of prevention is worth a pound of cure, right?

      Review Financial Statements

      Every month, set aside time to review your financial statements: your P&L statement, balance sheet, and cash flow statement.

      These reports give you a bird’s-eye view of your business’s health. In your head, it’s easy to underestimate expenses and over-calculate sales. But when those numbers are staring back at you in black (or red) ink, it’s much easier to celebrate your actual wins—and a lot harder to ignore pending issues.

      Types of Money Management

      Money management comes in many flavors, from inefficiently executed to every penny tracked in real time. Whatever your business financial management strategy, be sure you have one that you use consistently.

      Brushing up on money management skills, including growing your financial literacy, understanding cash flow, and learning to spot red flags in your financial reports, can help you to successfully launch your dream business.

      About the author
      Katherine O'Malley

      Katherine O'Malley is a contributor to the Lendio blog. A technology geek at heart, she splits her time between traveling, freelance writing, database administration work, and implementing SEO on her travel blog. In her free time, she loves to research the challenges small-to-midsize tourist suppliers face and find ways that technology can help them out.

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