How to Manage Business Finances

As a small business owner, it’s essential to master certain skills to increase your chances of success. One of those skills is managing business finances. As part of our “How-To for Small Business” series, we’re covering how to manage business finances. Keep reading to explore essential financial management tips to stay on top of your money, avoid common pitfalls, and set up your small business for long-term success.

Understanding Business Finances

Before we dig into how to manage business finances, it’s essential to understand the difference between managing your company expenses and income and handling your own personal budget. Personal financial management is generally simpler, even when considering factors like investments and debts. Business finances encompass all the financial resources of a company, including assets, operations, and liabilities, with the ultimate goals of growth and profitability.

Business income is generated from services and sales, and some investments may factor into that equation. Assets include property, inventory, and equipment, while liabilities include debts, deferred revenue, and inventory. You also have to consider any funds that are reinvested in the business and handle taxes based on your business setup (sole proprietorship, partnership, limited liability corporation, S- or C-corporation, etc.).

How to Manage Business Finances in 5 Steps

With a better understanding of what goes into managing business finances, you can start to create a plan.

Create a balance sheet

Accounting for expenses and revenue are the first steps in keeping track of your business finances. Your balance sheet will include that information, along with assets, equity, and liability. You can gain insights into your balance sheet by analyzing separate segments. For example, you could compare in-person to online sales to determine which segment brings in more revenue and plan accordingly.

Select an accounting method

The most common accounting methods used by small businesses are accrual and cash flow. The accrual method ensures that transactions go on the books as soon as a sale is complete. By contrast, the cash flow method only records transactions when payment has been received.

If you aren’t familiar with the different accounting methods, it’s worth budgeting for professional help. Bringing on a full-time bookkeeper may not work for your business needs, but you could consider a contractor or temporary hire to get things set up.

Establish a realistic budget

Although you may be familiar with budgeting on a personal level, creating a business budget is a bit different. On the business side, establishing a realistic budget is a crucial step toward profitability. Break down expenses in categories like:

• Employee costs (wages, benefits, taxes)
• Operational costs (rent, utilities, supplies, inventory)
• Other fixed costs
• Marketing

Budgets will need to shift as a business develops and achieves greater success. Plan to check in regularly and make any updates as shifts occur in expenses and/or income.

Stay up on taxes

Business taxes can be complex, especially for newcomers to the small business world. Various deadlines and regulations may apply, and they differ based on location, business structure, and other factors. Consult with a tax professional to navigate the complex world of business taxes.

Understand financial documents

Whether you’re facing an audit or preparing to start a round of funding, it’s critical to have current financial documentation for your business. The balance sheet outlines assets and liabilities, showing what your business owns and owes at any point in time. Income statements, also called profit and loss statements, show revenues, losses, profits, and expenses over time. Potential lenders and investors will expect to review these documents before making decisions.

Review finances regularly

When you’re running a business and managing the day-to-day tasks, it’s easy to let the finances slide to the back burner. But doing so can lead to many issues, including with tax liabilities and financial success. If you don’t have enough to cover expenses, you need to know that ahead of time so you can make adjustments. Staying on top of your business finances requires regular reviews and check-ins.

Whether you’re a new business owner or looking to refine your financial strategy, understanding budgeting, cash flow, and smart planning can be the difference between just getting by and financially thriving. We also covered other “how-to for small business owners” topics on our blog. Check out some of our most recent posts:

• How to Generate Customer Reviews
• How to Improve Customer Service
• How to Deal with Difficult Customers