9 Tips to Manage Your Business Finances

Managing your business finances is critical to keeping your small business running smoothly and making informed decisions. If you neglect to learn good financial management skills for your business, you could end up paying hefty penalties, have trouble securing financing and make suboptimal business decisions — all of which could shutter your business.

1. Separate business and personal finances

Many new small business owners use their personal credit cards to cover business expenses and deposit business revenue directly 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 keep 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.

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

2. Pay yourself regularly

Once you have a business account, it’s important to pay yourself on a regular basis. The way you pay yourself depends on your business structure. For example, S-Corp owners will need to use a formal payroll system, while sole proprietors can simply transfer money to their personal bank account.

Paying yourself regularly gives you a better picture of your business’s overall health, and that can impact your business decisions going forward.

If your business operates as a pass-through entity, such as a sole proprietorship or LLC, you’ll be taxed on that income on your personal tax return, so using that money for personal expenses is typical and expected. And paying yourself a set amount on schedule can help you manage your personal and business finances.

3. Understand your business’s financial documents

Small business financial statements can provide a lot of insight into your business’s financial health. You can use this information to make smart business decisions and interact with other groups, like lenders or grant-funding organizations. Documents you’ll need to understand include:

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 movement of cash 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. Choose an accounting method

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. For example, if you send an invoice to a client in December 2024 but don’t receive payment until January 2025, then you’d record that income for 2024, not 2025.

There are pros and cons to each accounting method.

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 finances and make tracking income and expenses much easier. Plus, your accountant will probably 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 help 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 affects 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 financially responsible. Companies may also report your payment information to other credit bureaus too, namely Experian Small Business and Equifax Business.

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. For most people, 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. If you don’t save for taxes, you won’t be able to pay these big bills when they’re due. And if you can’t do that, or if you don’t pay enough to cover at least 90% of your total tax liability at the end of the year, you’ll have to pay penalties and interest that can add hundreds more dollars onto your bill.

7. Use small business financing wisely

There are endless options out there for small business financial tools. Some, like loans, can help you get the capital you need to grow your business. Others, like small business credit cards, can be useful for making regular, periodic business purchases and earning rewards. There are lots of niche alternative lending products to help you with specific small business cash flow problems, too, like invoice financing if you have clients who take a long time to pay or merchant cash advances if your retail business operates on a seasonal cycle.

It’s often easy to get overwhelmed. But at the end of the day, you should always know exactly how much your financing costs — in dollars, as well as a corresponding annual percentage rate (APR) — and how that will impact your business budget and your bottom line going forward.

Often, the best time to apply for financing is when your business is in a strong financial position so you can grow it further and qualify for good offers, rather than when your business is hurting.

8. Set healthy billing practices

If your business operates by sending out invoices, it’s important to have structured systems in place so you can keep your cash flow running smoothly. First, know what’s normal in your industry so you can develop guidelines that your clients will accept. Here are some things to consider:

• Signed contracts: Having a signed contract in place specifies how you’ll work with your client, resolve any disputes, bill for payment and more.
• Payment terms: Negotiating when payment is due after you send out an invoice can help ensure you get paid. For example, a client with net-30 terms will need to submit payment within 30 days of receiving each invoice.
• Late fees and penalties: Some businesses choose to institute late fees or interest penalties if their client doesn’t pay on time. Be mindful of your state’s usury laws if you do this.

9. Have a safety net

You’re probably familiar with the importance of having your own emergency fund, but did you know your business should have one, too? This became apparent for many businesses during the COVID-19 pandemic, but unexpected business shortfalls can happen for many reasons.

Setting aside three to six months’ worth of operational expenses can help tide your business over during financial snags. That’s a lot of cash to have on hand, but saving a little at a time, perhaps 10% of your income in a separate high-yield business savings account each month, can help you reach your goal.