19 Tips for Managing Your Small Business Finances
Your small business's finances are central to its success. As your business grows and matures, the financial tasks you handled yourself at the start become more complex and time-consuming, while compliance risks keep rising. If you're unsure how to manage your small business finances as you scale, these tips can help.
Small business owners, freelancers, and self-employed entrepreneurs should use this guide for practical tips spanning accounting, banking, credit, taxes, and growth planning.
Key Highlights
Choosing between cash and accrual accounting changes when you record revenue and expenses.
Separating business and personal finances through a dedicated bank account and credit card is one of the simplest ways to keep records accurate.
Small businesses can owe several types of tax, including employment, estimated, excise, income, and self-employment, each on its own schedule.
Reviewing costs, forecasting cash flow, and tracking ROI turn small business financial management into an ongoing practice rather than a once-a-year rush.
A dedicated accountant can help apply these fundamentals consistently throughout the year, not just at tax time.
1. Choose an Accounting Method
You can choose from two accounting methods to track your business transactions: cash method or accrual.
Cash
Small businesses that use cash accounting record revenue when they receive cash and deduct expenses when they pay them.
While cash accounting is more straightforward, it may have downsides for some small business owners. This accounting method doesn’t include either accounts payable or accounts receivable.
Accrual
The accrual accounting 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 receivable, accrual accounting does. This gives business owners a holistic view of their business's financial position.
2. Choose or Update Your Business Entity
You can select from any of the following business entities. Choosing the right business structure matters because it defines how you operate, how you protect personal assets, and your ongoing tax obligations.
Entity | Best Suited For |
|---|---|
Sole proprietorship | A single owner who wants the simplest setup and is comfortable with unlimited personal liability |
Partnership | Two or more owners sharing profits, losses, and management responsibilities |
LLC | Owners who want liability protection with flexible management and tax treatment |
Eligible small businesses looking to reduce self-employment tax through a reasonable salary structure | |
C corp | Businesses planning to raise outside investment or eventually go public |
You can switch your business entity, but you may need a new EIN depending on your selection.
3. Create a Balance Sheet
Using a balance sheet is another great way to manage your business finances. A balance sheet lets you track your assets, equity, and liabilities. This will allow you to see the financial status of your company, including any debt that you’re carrying.
Balance sheets are also helpful if you want to pursue investing or lending opportunities. Investors or lenders will want to 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 (CBA) is another helpful way for a small business to evaluate its decisions or procedures.
You’ll do a CBA to compare costs or benefits before your business makes an important strategic move.
To do your CBA, follow these steps:
List costs that may arise if your small business decides on 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. This can be a significant task when managing your small business finances. If you find opportunities to save money, consider cutting costs to reduce business expenses.
To review your costs regularly, you may want to draft a formal business budget to see how your costs change over time.
6. Open a Business Bank Account
One of the first things you should do as a small business owner is to open a business bank account. This account offers practical and professional benefits and keeps personal and business accounts separate.
To open a business bank account, you’ll need the following documents:
Business license
Ownership agreements
Employer identification number (EIN)
Business formation documents
If you’re opening a separate business 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 can be hard to track without a business credit card. Isolating business transactions improves bookkeeping accuracy and makes tax season smoother.
Opening a small business credit card account helps keep transactions separate, so personal purchases never show up on your business account.
8. Manage Your Business Credit
Opening a business credit card is the first step to managing your business credit. Follow these steps to manage yours efficiently:
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.
Financial management software can help streamline this process.
9. Pay Yourself
How you pay yourself can differ by business entity. The IRS has different rules for corporation officers, partners, and shareholders whether they are employees or nonemployees.
You should also consider "reasonable compensation" when paying yourself. For employees, reasonable compensation is the amount you would pay a similar worker outside your business entity for the same work.
10. Understand Business Loans
There are several business loans your small business may qualify for, including:
7(a) Small Business Loan
Business Physical Disaster Loans
Certified Development Company (CDC) (504) Loan Program
Microloan Program
A business loan can also help boost your cash flow. Always check the terms and conditions of a loan. In some cases, it may become a grant if used correctly.
11. Invest in Your Business Growth
Business growth is essential at every stage. As you invest in your small business, you'll have more development, marketing, and sales.
While there are many ways to invest in your small business growth, it may be best to focus on online marketing to attract the most customers.
Over time, business finances and business growth will become more critical, so you’ll want to invest 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.
Tax Type | What It Covers |
|---|---|
Employment tax | Federal income tax withholding, Social Security, Medicare, and unemployment tax for employees |
Estimated tax | Quarterly prepayments on business income not subject to withholding, common for owners and the self-employed |
Excise tax | Taxes on specific goods, services, or activities, such as heavy highway vehicle use |
Income tax | Federal (and often state) tax on business or pass-through income |
Self-employment tax | Social Security and Medicare tax owed on net earnings from self-employment |
13. Make Tax Payments on Time
Although outside the scope of operating expenses, timely payments are crucial to avoid penalties.
Employment taxes consist of federal income tax withholding, federal unemployment tax (FUTA), and Medicare and Social Security taxes. Deposits are usually monthly or semiweekly, depending on your business’s assigned schedule. IRS Form 941, Employer's Quarterly Federal Tax Return, is typically due by April 30, July 31, October 31, and January 31.
Other tax payment deadlines:
Estimated taxes have a quarterly payment deadline, typically due by the middle of April, June, September, and January.
Excise taxes have different due dates. If your vehicle was first used on public highways in July, the deadline for IRS Form 2290, Heavy Highway Vehicle Use Tax Return, is August 31. The “month after first use” rule applies only to vehicles placed in service later in the year.
Income taxes are due by April 15.
Self-employment taxes are due quarterly.
14. Keep Your Books Updated
As your small business grows, so does its complexity, making it more challenging to keep your books accurate and up to date. If you don’t update your books consistently, they almost certainly won't be balanced.
Review these common bookkeeping terms to increase your mastery of the process.
15. Measure Your ROI
ROI, or return on investment, shows whether your business investment effectively earns income. ROI can also help you determine how much profit you’re making for the time you invest 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
Tracking invoices is vital to your financial health and helps avoid bookkeeping errors.
You can choose from several invoice accounting software tools or work with an accountant to keep your invoices organized and error-free.
17. Keep Costs Low
If you find that your budget is high, look for ways to reduce costs, including:
Bartering with other businesses for goods or services.
Eliminating or reducing your advertising and marketing spend.
Eliminating or reducing how often you use a business vehicle.
Reducing the amount of office space.
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 help small business owners predict budgets and revenue.
Financial forecasting has two types: qualitative and quantitative. You may prefer qualitative forecasts if your small business doesn’t yet have historical data available. You may prefer quantitative forecasts if you need to examine extensive historical data to figure out patterns or trends.
19. Turning These Tips Into a Year-Round Financial Habit
These financial tips work best as part of an ongoing practice, not a once-a-year sprint ahead of tax day. While this guide puts you in a better position to manage accounting, banking, credit, taxes, and long-term growth planning, expert support streamlines the process.
If you're ready to focus on growth while your team handles the accounting work, schedule a free 30-minute tax consultation with 1-800Accountant to learn more and to get started.
FAQs About Managing Small Business Finances
What’s the difference between cash and accrual accounting for a small business?
It's important to understand how to manage small business finances. Cash-basis accounting records revenue when cash is received and expenses when they are paid. In contrast, accrual accounting records income when it is earned and expenses when they are incurred, regardless of when money changes hands. While cash accounting is simpler and closely mirrors your bank balance, accrual accounting offers a more accurate long-term picture of business profitability. Many small businesses start using the cash method and switch later.
Do sole proprietors need a separate business bank account?
Sole proprietors are not legally required to open a separate business bank account. However, it is strongly recommended to keep personal and business finances separate. Having a dedicated account simplifies tracking deductible expenses, lowers audit risk, and prevents messy recordkeeping at tax time.
How often should a small business review its finances?
Check your bank accounts and daily transactions frequently to monitor cash flow and prevent fraud. Review core financial statements like profit and loss statements and balance sheets at least once a month. These regular monthly reviews help you spot trends early and make timely business decisions.
What’s the easiest way to start setting aside money for taxes?
The easiest method is opening a separate dedicated savings account linked to your business banking. Automatically transfer an estimated 25% to 30% of every incoming payment or net profit directly into this separate bucket. This "automated" habit ensures you have the cash ready when quarterly estimated tax payments are due. It's always a best practice to keep personal finances separate from business assets and your business checking account.
When does it make sense to hire an accountant instead of doing the books alone?
Hire a professional when bookkeeping takes too much time away from growing your business or managing operations. You should also outsource your books if your financial situation becomes more complex because of inventory, multi-state sales, or adding employees. A professional is invaluable when tax strategies, compliance deadlines, or potential audits go beyond your comfort level.
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.