19 essential tips for managing your small business finances.

At any point in the management of your small business, your small business's finances will be central to its success. As your business grows and develops, it can become more challenging to pinpoint where to focus your time to ensure your finances are running smoothly.

Managing your small business's finances may be stressful, but there are some tips to make the process easier. Here are 19 tips on how to manage small business finances.

1. Choose an Accounting Method

There are two accounting methods you can choose to track your transactions. You can choose from either the cash method or the accrual method of accounting.

Cash

The cash accounting method is one of the accounting methods. Small businesses that use cash accounting add revenue when the business receives cash. The same business using cash accounting will deduct expenses when the business pays an expense.

While the cash accounting method is more straightforward, there may be a downside to some small business owners. This accounting method doesn’t include either accounts payable or accounts receivable, thus it would be beneficial for small businesses to get an idea about the accounting methods. Examining the best CFA exam study materials will help you understand how to proceed with financial education.

Accrual

The accrual accounting method is the second accounting method. This method is based on the matching principle, meaning that each transaction matches its expense and revenue.

When using the accrual method of accounting, you’ll list the business expenses and revenues as they occur. This means that you’ll list expenses when paid and revenue when earned.

While the cash accounting method doesn’t use accounts payable or accounts payable, accrual accounting does. This allows business owners to have a wholesome view of where their business stands financially.

2. Choose or Update Your Business Entity

While you can choose from any business entity, you can use tricks to make selecting one easier. You can choose from the following business entities: 

  • C-Corp
  • LLC
  • Partnership
  • S-Corp
  • Sole proprietorship

    • You can also update your business entity, but you may need a new EIN depending on your business entity.

    3. Create a Balance Sheet 

    Using a balance sheet is another way you can manage your small business finances. By using a balance sheet, you’ll be able to track your assets, equity, and liabilities. This will allow you to see the financial status of your company, including any debt that you’ll need to pay. 

    Balance sheets are also helpful if you want to pursue investing or lending opportunities. Investors or lenders will review your balance sheets to see if your small business is worth investing in or lending to.

    4. Do a Cost-Benefit Analysis

    A cost-benefit analysis is another helpful way a small business can examine its decisions or procedures.

    You’ll do a cost-benefit analysis, or CBA, to compare costs or benefits if your small business wants to do potential business actions. 

    To do a cost-benefit analysis: 

  • List costs that may arise if your small business makes a decision regarding a procedure or project.
  • List the benefits you or your small business will have by making that decision.  
  • Provide value to both your costs and any benefits.
  • Divide your benefit value sum by your cost value sum to determine your benefit-cost ratio (BCR).

    • A positive BCR means the business action may benefit your small business.

    5. Review Your Costs

    As your small business grows, you’ll need to review your costs which can be significant for small business finance management. If there are ways that you can save money, you may consider cost-cutting as a way to reduce business expenses.

    To review your costs regularly, you may want to make a business budget to see how your budget changes over time.       

    6. Open a Business Bank Account 

    One of the first things you can do as a small business owner is open a business bank account. This account offers practical and professional benefits, and it can be helpful for future opportunities. 

    To open a business bank account, you’ll need the following documents:

  • Business license
  • Ownership agreements
  • Your Employer Identification Number (EIN)
  • Your business formation documents

    • If you’re trying to open a business bank account as a sole proprietor, you can use your Social Security number instead of an EIN.

    7. Open a Business Credit Card

    Small business finances may be difficult to track if you don’t have your own business credit card. 

    Opening a small business credit card account will help you have separate transactions so that personal transactions won’t appear in your business credit card account. 

    8. Manage Your Business Credit

    Opening a business credit card is the first step to managing your business credit. Over time, there are a few steps you can follow to manage business credit:

  • Determine whether you have business credit on file.
  • Establish a business credit history by using lines of credit associated with your business.
  • Pay bills on time and understand the factors that influence your credit rating. 
  • Keep your credit files current and monitor your credit files for rating changes.
  • Know your customers’ and vendors’ credit standing.

    • 9. Pay Yourself

    The process of paying yourself differs according to the business entity you have. The IRS has different rules for corporation officers, partners, and shareholders whether they are employees or nonemployees.

    You should also consider the idea of reasonable compensation when paying yourself. For employees, reasonable compensation is the amount paid to you that a similar worker outside your business entity would receive for the same work.

    10. Understand Business Loans

    Business loans are available to small businesses that qualify. Currently, you can still apply to COVID-19 related business loans:

  • Economic Injury Disaster Loan (EIDL)
  • Paycheck Protection Program (PPP) 

    • There are additional business loans your small business may qualify for, unrelated to COVID-19 loans. Some of these business loans you may apply for include: 

  • 7(a) Small Business Loan
  • Business and Industrial Loans
  • Business Physical Disaster Loans
  • Certified Development Company (CDC) (504) Loan Program
  • Fisheries Finance Program
  • Indian Loan Guaranty, Insurance, and Interest Subsidy Program
  • Microloan Program
  • Military Reservist Economic Injury Disaster Loan Program
  • Small Business Investment Company (SBIC) Program

    • A business loan can also be helpful in boosting cash flow. You’ll want to check the terms and conditions of loans if you qualify. In some cases, such as the PPP Loan, your loan may become a grant if used correctly.

    11. Invest in Your Business Growth

    Business growth is essential at any stage of your small business. As your small business invests in itself, there will be more development, marketing, and sales opportunities.

    While there are many ways you can invest in your small business growth, it may be best to focus on online marketing to attract the most amount of customers.

    Over time, business finances and business growth will become more critical, so you’ll want to invest in growth early.

    12. Understand Your Tax Options

    One factor to consider when managing small business finances is your tax options. Depending on your business entity, you may have to pay multiple taxes with different deadlines. There are up to five small business taxes you may have to pay during the year:

  • Employment tax 
  • Estimated tax
  • Excise tax
  • Income tax
  • Self-employment tax

    • 13. Make Tax Payments on Time

    While this is outside of operating expenses, making timely payments is crucial in financial management to avoid penalties. 

    Employment taxes consist of three separate taxes: federal income tax withholding, federal employment (FUTA) tax, and Medicare and Social Security tax. As a whole, employment taxes have deadlines of January 31, April 30, July 31, and October 31.

    Other tax payment deadlines are: 

  • Estimated taxes have a quarterly payment deadline. 
  • Excise taxes have different due dates. If you’ve driven a heavy truck in the current month, you’ll file and pay taxes before the end of the following month.
  • Income taxes have a payment deadline of April 15.
  • Self-employment taxes have a quarterly due date.

    • 14. Keep Your Books Updated

    As your small business grows over time, it may become challenging to keep your books updated. If you don’t update your books frequently, you may not keep them balanced. 

    When updating your books, you’ll want to remain up to date on common bookkeeping terms so that you’ll understand what important terms mean.

    15. Measure Your ROI

    ROI, or return on investment, is a way to see if your business investment effectively earns income. ROI can also help you determine how much profit you’re making for time invested in your business.

    To calculate and measure your ROI, you’ll divide your net benefits from an investment by the total cost invested. You’ll receive the calculation of an ROI as a percentage or ratio.

    16. Track Invoices

    It’s vital to track invoices so that you won’t have any errors with your bookkeeping needs.

    You can choose from several invoice software tools, or work with an accountant, to ensure that your invoices remain organized and without errors.

    17. Keep Costs Low

    If you’re having trouble keeping your business costs low, you’ll want to consider:

  • Bartering with other businesses for goods or services.
  • Eliminating or reducing your advertising and your marketing costs.
  • Eliminating or reducing how often you use a business vehicle.
  • Reducing the amount of office space you use.
  • Reducing your supply costs.

    • 18. Do Financial Forecasting

    Include financial management in your future business plan, especially for a small or growing business. Financial forecasting can help you predict future business performance based on past financial information. It can also assist small business owners with predicting their budgets and revenue.

    There are two types of financial forecasting: qualitative forecasts and quantitative forecasts. You may prefer qualitative forecasts if your small business doesn’t have historical data available. 

    You may prefer quantitative forecasts if you need to examine extensive historical data to figure out patterns or trends. 

    19. Work with an Expert Accountant

    You can manage your small business financing in many ways to make sure you avoid financial problems or unbalanced books. 

    When you need to manage your small business finances, we’re here to help. Work with the small business tax accountant at 1-800Accountant for help to manage your small business finances.

    This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.