Published December 22, 2021 by WC Team

The Ultimate Guide To Managing Small Business Finances

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5 Comprehensive Steps To Manage Small Business Finances

Do you ever feel overwhelmed while managing your venture’s finances? Your worries are over.

This guide will help aspiring and existing entrepreneurs learn how to manage their money matters even if they have no prior experience of managing finances. Here are five easy steps that will help you achieve perfection:

  1. Separate your business and personal bank accounts
  2. Hire a finance professional or invest in an accounting software
  3. Satisfy your business tax responsibilities 
  4. Understand and improve your personal and your business’s credit score
  5. Look for easy to repay business loans and financing options

Understand Business Accounting

To manage one’s finances, an understanding of basic accounting terms is a must. Therefore, here’s a list of the most common ones which will help you while looking into your finances. 

  1. Break-Even Point: Most small businesses work on a loss for their first few months, sometimes years. It is the point where a business neither earns profit nor makes a loss. It is after achieving the breakeven when your business starts earning a profit. 
  2. Gross Revenue: The sum of all funds you have received in sales, without taking any expenses into consideration. 
  3. Expenses: Anything that you have to spend, this usually includes rent, taxes, operating cost, payroll, etc.
  4. Cash flow: It is the flow of funds, whether through inflow via sales revenue, sale of fixed assets, receipt of dividend, etc., or outflow of funds, for example, payment of raw material, legal fees, etc. More inflows and less outflows mean that you have a positive cash flow, and if outflows exceed inflows, you have a negative cash flow. 
  5. Net Profit: The total amount your business earns after you subtract all your expenses from your gross revenue. If it is a positive value, then your business is profitable. If your expenses exceed your gross profit, you’re making a loss. 

Most Important Business Accounting Documents

Income Statement: This contains all your revenue and expenses in a given year, and you can calculate your net profit or loss by making one. 

Balance Sheet: A balance sheet is used to calculate your business's net worth; it contains all your assets, liabilities, and equity. It can give you a quick look at what your financial position is at any point.

Revenue Forecast: It is an educated prediction about your business's revenue and expenses for the upcoming year.

Cash Flow Statement: It represents the cash position available at the beginning of a financial period, the sources of funds and their utilization, and the cash position at the end of the financial period.

Pay Business Taxes

Taxes are one of the most challenging and tedious tasks of business finance, but the consequences of not filing your taxes properly are also severe. To avoid this, here's what you need to know about paying business taxes:

  1. Get your Federal Tax Identification Number
  2. Understand the different type of business taxes and know which applies to you and your business:
    1. Income tax
    2. Self-employed tax
    3. Estimated taxes
    4. Employment taxes
    5. Excise tax
    6. Your state tax responsibilities

The Best Small Business Accounting Software

If you're trying to manage your finances manually, the process can become tedious and mundane, which is why many experienced small business owners prefer using accounting software. 

Here are the top 3 software for small businesses; Visit their websites for more details.

  1. QuickBooks Online
  2. FreshBooks
  3. Xero

Best Way To Keep Track Of Small Business Finances

While using the right accounting software can help tremendously, there are some things an average person can't do – it needs specialized skills. Hence it may be best for you to hire a professional accountant to go through your finances at least once a year to ensure your finances are correct and up to date.

Get A Handle On Your Credit Scores

Your credit scores are a vital part of your business finance, so understanding credit score and getting a handle on it is extremely important. Depending on your credit score and business history, you'll be able to apply and qualify for different business financing options, both of which are dependent on how you manage your business finances. 

Manage (And Boost) Your Personal Credit Score

Now that you know the importance of your credit score, here is what you need to know about managing and boosting your credit score. The higher your credit score is, the more investors are willing to give you a loan. Here are a few simple ways you can maintain or attain a perfect credit score:

Understand Your Business Loan and Financing Options

You will need some form of financing at some point in your business, so you need to understand the different options available. There are different types of loans that have different requirements, you can check your eligibility here. We’ve also provided a list of loan options for you. 

How To Organize Your Business Finances So You Can Afford Your Loan

Before applying for business financing, you have to organize your finances to check whether you can afford the loan costs. Here are a few things to keep in mind while analyzing your finances to decide whether to apply for the business loans:

  1. Manage your payment and amortization schedules
  2. Do a complete loan performance analysis 
  3. Calculate your debt service coverage ratio

The Final Word

Regardless of your background, managing your finances can be extremely daunting, but you can contact a Small Business Development Center for more help who can then connect you with a mentor to guide you better in terms of managing your finances. If you are still struggling, remember the 5 steps we have talked about:

  1. Separate your business and personal bank accounts
  2. Hire a professional or invest in an accounting software
  3. Satisfy your business tax responsibilities
  4. Understand and improve your and your business's credit score
  5. Look at business loans and financing options
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