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How to Make Managing Your Small Business Finances Feel Less Taxing

by BBB Staff BBB Staff | Dec 10, 2021 12:15:00 PM

Ask any owner of the 31.7 million small businesses in the U.S. today about success and they’ll likely tell you it requires a combination of passion, drive, and unrelenting dedication. That’s not the whole story, though. Building and maintaining a strong business also relies heavily on the concepts of financial management, budgeting, bookkeeping, and taxes.

Protecting your investment means paying proper attention to financial details. Not only will efficient practices help promote your profit, but your diligence can also protect you and your staff from compliance issues and legal trouble. Those habits can also provide an important financial safety net during trying circumstances, like, say, a worldwide pandemic.

Understanding the basic concepts of small business finance is an important step in securing the future of your company. Those fundamentals provide a necessary foundation for any business looking to grow.

Financial Management: Vital to Your Bottom Line

For for-profit businesses, keeping a close eye on your cash flow, expenses, and revenue is a mandatory step in maximizing earnings, growing, expanding, and hiring more help. For non-profit businesses, proper oversight of donations, grant dollars, and all other sources of income is necessary in the event of an audit or inquiry.

Failing to understand these basic financial measures comes with some consequences. If your small business has investors, then as an owner or manager, you’re accountable for supplying them any requested financial records. Additionally, mismanaging your money creates cash flow problems that can lead to vendor/supply-chain interruptions or delays in acquiring inventory.

Best Practices for the Business Owner

Financial management is not necessarily difficult, it just requires diligence and commitment. More than half of small businesses fail to survive past their fifth year of operation. These are some measures to help secure long-term financial success:

1. Start with a Workable Budget.

A budget helps account for every penny that comes in and out of your business. To get started, make a list of all your expected monthly income sources, including sales, interest on investments, rental property income, etc. Income information can be gathered from your profit and loss statement, discussed in further detail below.

Then, make a separate list of the expenses you expect your business to incur on a regular basis. Those costs may include inventory purchases, payroll, insurance premiums, taxes, utilities, fees, and payments on debts (to name a few).

2. Educate Yourself on Bookkeeping Techniques.

Bookkeeping is a method by which an owner keeps track of all financial transactions conducted by the business within a period (often monthly). You can opt to bookkeep the old-fashioned way with a pencil and a ledger book. You also have the option of cloud-based bookkeeping through tools like QuickBooks, Xero, or Mint — all of which are available for a reasonable fee. Free options are available, too. Some small businesses also opt to outsource this task to a trained bookkeeper who may work as a contractor or part-time employee.

3. Understand Cash Flow.

Understanding where your money goes is an integral piece to financial management. As one study revealed, as many as 82% of failed businesses point to cash flow issues as the culprit. That has been especially true during COVID-19.

A cash flow statement covers a specified period of time and accounts for the amount of cash spent and for what purpose. It helps avoid unnecessary bank account overdrafts, overspending, and unnecessary hemorrhaging of liquid assets. Like a business budget, cash flow worksheets are readily available online.

4. Put Together a Profit & Loss Statement.

A profit and loss statement examines the overall business revenue, profits, and losses within a certain period of time (e.g., quarterly, annually). The statement is important for the purposes of obtaining working capital or seeking a business loan. It is also important for businesses with investors or shareholders, as it provides a full financial picture. Be sure to keep this updated regularly so it is ready if requested. Workable templates are available at low or no cost.

5. Update Your Balance Sheet.

A balance sheet keeps track of a business’s assets, liabilities, and equity. The document is likewise important to keep updated, and the general goal is to balance assets equally against liabilities plus equity. This document is important to lenders and investors, so be sure to make regular entries as your financial picture changes.

6. Start Forecasting.

Are you expecting sunny skies ahead? Forecasting your financial picture is key to meeting goals, determining whether it is time to take out a loan, or deciding it may be time to reduce expenses. There are a couple of different ways to prepare a revenue forecast. Working with a trustworthy, experienced professional to get the hang of this technique may be necessary for the first few years.

Tips for Success

When it comes to financial management, your to-do list can quickly seem overwhelming. These are some best practices to help you maximize organization, efficiency, and compliance.

  • Obtain a Tax ID: In many cases, a small business will need to assume its own individual identity, starting with the assignment of an employer identification number, or EIN. It is easily obtained from the IRS, and the forms can be filled out online.
  • Checking the Boxes: All business funds should be kept completely separate from personal funds. Once you receive your EIN, use it to open a commercial checking account at a bank with which you are comfortable. Don’t skip this step, as “commingling of assets” is one of the top reasons for an IRS audit.
  • Payroll: If your business has employees, you must be very diligent in properly setting up payroll. Accounting software can help with this, and you should consider putting together an employee handbook to keep workplace conflict at a minimum (including policies relating to paid time off, bonuses, etc.). If your business utilized a PPP loan, there are some additional payrolls factors to consider as well.

Your state/local jurisdiction may also have additional start-up requirements for you to follow, such as obtaining a business license or submitting to inspection. Be sure to check on these policies, or your business could incur fines and penalties.

Want to learn more? Here are some relevant resources to check out:

How to Budget and Increase Profits for Your Small

Startup Costs to Consider as a New Business Owner

5 Accounting Mistakes Small Businesses Make

10 Finance Tips for Small Business Success

How to Project Sales for the New Year

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