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7 Tips to Manage Your Business Finances

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Managing your business finances is critical to keeping your business running smoothly and making informed decisions. Neglecting your small business financials could mean losing out on valuable tax deductions, having problems getting loans and making business decisions that create more problems.

If you’re ready to start managing business finances better, this guide offers seven tips to get organized and build a foundation for your business to grow.

1. Separate business and personal finances

Many new small business owners use their personal credit cards to cover business expenses and deposit business revenue into their personal checking accounts. While that might be convenient at first, it can lead to serious complications.

For example, the IRS allows business owners to deduct business-related expenses, such as business travel and supplies. However, you have to provide proper documentation to support those deductions. If the IRS audits your return and you don’t have a clear record showing which transactions were business-related and which were personal, you could lose out on those deductions.

To avoid that headache, open a business bank account. You can usually find one that offers free checks, no monthly maintenance fees and unlimited transactions.

2. Pay yourself a salary

As a small business owner, you may pay yourself last or even forgo a paycheck entirely to conserve cash and put more money back into growing the business. But paying yourself from the beginning — even if it’s just a few hundred dollars a month — has advantages you can’t afford to miss. For one, it helps you pay your personal expenses and build your savings. That’s crucial if the business doesn’t work out.

How you pay yourself depends on how your business is structured, so talk to your accountant or do some research into taking a salary versus a draw.

3. Start with the required financial documents

Small business financial statements can provide a lot of insight into your business’s financial health. There are three basic financial statements you should know.

Balance sheet

The balance sheet shows what your business owns (assets) and owes (liabilities) at a specific point in time. It also shows your equity — the difference between assets and liabilities — which is the amount of money you would be left with if you sold all business assets and paid off all business debts.

You use the numbers on your balance sheet to determine whether your business can pay its bills and understand whether you can purchase additional assets or take out loans.

Profit and loss statement

The profit and loss statement, also known as the income statement, shows your business’s revenues, expenses and profit or loss over a period of time — usually a month, quarter or year.

Analyzing your profit and loss statement can help you determine which aspects of your business are profitable. Investors and lenders also review your profit and loss statement when deciding whether to invest or lend to you.

Cash flow statement

The cash flow statement summarizes the cash that moved in and out of your business over a period of time. Analyzing your cash flow statement can help you determine how much cash you have available to pay bills and grow your business.

4. Follow accounting best practices

One of the first financial decisions you need to make in your business is choosing between cash and accrual basis accounting.

Cash basis accounting is based on your company’s cash activity. It records revenue when money comes in and expenses when money goes out. Accrual basis accounting is more complex because it tracks revenue when earned and expenses when incurred, regardless of when cash changes hands.

There are pros and cons to each accounting method.

Cash

ProsCons

  Easy to learn and maintain

  Business owners don’t have to pay taxes on income they haven’t collected

  Limited view of income and expenses

  Not appropriate for businesses that carry inventory

Accrual

ProsCons

  Gives a more accurate picture of income and expenses during the period

  Preferred by lenders and investors

  More complicated and time-consuming

  Businesses may owe taxes on income they haven’t yet received

Choose accounting software

Some companies might be able to manage small business finances in a notebook or spreadsheet, but accounting software can help streamline your business financials and make tracking income and expenses much easier. Plus, your accountant will be happier to get tidy business financial statements than a box of receipts at tax time.

There are several small business accounting software options, so it’s worth checking out several and taking advantage of their free trials. Some features to look for include:

  • Cloud access so you and your accountant can access your books any time, anywhere.
  • Customer support reputation so you won’t be struggling on your own if you run into problems.
  • Integration options to connect your books with your business bank account, payroll provider, customer relationship management (CRM) software, etc.
  • Automated tasks such as sending invoices and recording and classifying expenses.

Consider an accounting professional.

Working with an accounting professional can make managing business finances easier. They can help craft a business plan, select a business entity type, manage accounts payable and apply for business loans.

You don’t necessarily need to hire a full-time accountant. If you need to keep costs low, consider outsourcing to someone who can spend a couple of hours a month reviewing your DIY bookkeeping and providing strategic advice. As your business grows, you can always scale up their services to get help with payroll, inventory, cash flow management and more.

5. Build your business credit score

Your business credit score impacts everything from qualifying for business credit to landing contracts and the rate you’ll pay for business insurance. So it’s important to regularly check your business credit report.

To build your business credit, start by registering for a free DUNS number through Dun & Bradstreet. Use your DUNS number when applying for business credit cards or trade credit accounts. Then make on-time payments to show business credit bureaus that you’re reliable.

Keep in mind that not all credit card companies and vendors report payments to the business credit bureaus. If you’ve been making on-time payments and they haven’t been submitted, consider signing up for Dun & Bradstreet’s CreditBuilder product. Dun & Bradstreet will seek out your payment experience from vendors and include it in your PAYDEX business credit score.

6. Plan for and pay business taxes

Every business has to pay federal income taxes on business income. How you pay those taxes and the tax rate you pay depends on your business structure.

Get in the habit of setting aside a portion of your income each month so you have the cash available to make estimated tax payments. Those payments are due on:

  • April 15
  • June 15
  • September 15
  • January 15 of the following year

If any of those dates fall on a weekend or holiday, the deadline shifts to the next business day.

7. Explore small business loan options

With a clear picture of your business finances, consider whether you want or need a small business loan. A loan can help resolve cash flow problems, allow you to purchase essential business equipment and provide growth opportunities.

With organized accounting records and accurate, timely financial statements, you’ll be in a good position to qualify. Depending on lender requirements, you may also need:

  • A business plan
  • Accounts receivable and accounts payable aging reports, which demonstrate the financial health and credit risk of your business
  • Collateral
  • Copies of your business license, articles of organization and any contracts you have with vendors or customers.
 

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