Best Practices for Managing Small Business Finances

Smart financing is the backbone of your small business. While a small business can start, and even grow, without a solid financial plan, preparation is key to profitability in the long term. So let’s dive into some best practices for managing small business finances!

The nature of each business differs, as does the expected value of investments, loans, taxes, and other financial instruments. One size doesn’t fit all and you can’t necessarily play copycat and follow another business’s steps. 

Look at financial management as one of your main support systems to tap into the maximum potential of your business and cater to its specific needs. 

Understanding Financial Management 

Business finances include all dealings of a monetary nature. This includes revenue, expenses (all those bills!), investments, loans and repayments, government taxes, and so much more. Since the types of monetary exchange is an extensive list, monitoring it is crucial.

In financial management, you create a game plan for how you’ll be tackling everything money, including recordkeeping, short and long-term budgeting, tracking of expenses and income, and much more. Considering there’s so much you can do in this department, you should decide on a concise process with limited steps.

By planning and staying updated with where your money is moving, you’ll save on time, effort, and losses.

5 Expert Tips to Stay On Top of Your Finances

While you could deep dive into all things accounting and finance, let’s start by dipping our toes in the water with some crucial steps. These steps can help put you on track and streamline your financial management in the long run.

Here are some top tips from experts on managing your small business’s finances:

1. Separate Personal and Professional Finances

If you’ve been running your business through your personal bank account, odds are you’ve already faced some challenges.

Combined (personal and professional) finances cause a haphazard record of your business finances. You likely have all the ins and outs somewhere, but sifting through your records becomes a time consuming challenge. More importantly, producing business-only bank statements is a nightmare.

To avoid the misery, separate your business account to track everything separately and smoothly. You’ll have a clear report on what’s going on financially and save on overspending or missed opportunities. You could also benefit from financial programs aimed at small businesses by banks or other organizations.

2. Work on Your Business Credit Score

Another important personal and business boundary falls with the credit score. While your personal credit score may be outstanding, it isn’t necessarily the best option for business dealings.

While many people make it work, sharing your personal credit with your business can hold you back. Separate credit cards will help keep both scores optimal, help you keep your business and personal spending separate, and limit the risk of missing a steep repayment with high interest rates. It can also provide for a higher spending limit overall – just be careful not to overspend!

Money spent in business is different from money spent personally. Your personal credit score may show how well you manage money, but it’s not a testament to how well you run your business. Additionally, some loans and investment opportunities prefer business credit over personal credit. 

While building your business credit score may feel like you’re starting from scratch, it has its benefits. Using your credit according to it’s intended purpose will stop personal financial issues from translating into your business and vice versa.

Here are some tips to improve your business credit score.

3. Be Aware of the Ins and Outs

Cashflow. Cashflow. Cashflow. 

No matter how many times we write it down, we can’t highlight the importance of tracking your cash flow enough! Whether it’s monthly, quarterly, or another cadence depends on you.

Now that you’re thinking about your cashflow, it’s important to understand the concept of negative and positive cash flow as well. 

Negative cash flow is when you’re in a cash flow shortfall, so use external funds (drafts or loans) because you don’t have money on hand for payment. Technically, you’re going into “-” for the money you have. 

Positive cash flow is when you have surplus income, which you can use for payments. You stay in the “+” for the money you have.

Tracking whether your flow is positive or negative tells you whether you have money on hand. When push comes to shove, this can save your business from failing. Check out our financial tracker today!

4. Track Your Tax Payments – and Pay!

We may not like them but tax payments are unavoidable and can be a source of stress on you and your business. By tracking your payments and planning for the next one due, you’ll know to have the necessary cash on hand and prevent any late payment penalties.

An easy way to collect funds for these payments is by saving a percentage of your revenue each month. If that’s not possible, do so every three months. By periodically adding to your savings, you’ll always make timely payments and never scramble for funds at the last minute.

When you make a habit of saving, you can also be prepared for other situations, such as unforeseen setbacks, big purchases, down payments, and more. These minor adjustments can help you score bigger opportunities.

5. Make Budgeting Your Best Friend

As a small business, budgeting isn’t as gruesome of a task for you. That’s one benefit of having a small team, efficient allocation of resources, and limited funds.

By budgeting, you’re planning for the coming term, whether a month, six months, or a year. Longer-term budgeting is also possible but may not suit the nature of your business and its market. First, you’ll need to decide the term it will cover.

In your budget, add your expected expenses, savings for a rainy day, and other areas where money may be used. Consider your predicted revenue and be realistic about how much external investment you’ll need.

A great tip is to round up your expenses and round down your income. This can give you a little extra wiggle room and help you limit when you spend and retain more cash than you otherwise would.

Looking For More Information?

If you’re looking for more details, check out our guide. As a Strategic Transformation Advisor, business finances are something I’m well-versed with. If you’re feeling underconfident about your plan or don’t understand where you should start, feel free to drop a comment below. Let’s start a conversation about where we can go from here!