Every day, chefs open restaurants, bakers open bakeries, and dentists open dental practices because they’re passionate about what they have to offer. You likely opened your business with that same passion, and as you’re working to grow your business you’ll need to learn to manage business finances.
In this overview, you’ll explore the top five best practices for small business finances. By mastering these points, you’ll be on your way to a strong financial foundation!
Business finances: What you need to know and why
Unless you have someone on your team who’s an expert in business finance, you need to learn the basics to run a successful business. Even if you do have someone in place, it’s still a good practice to have a handle on your business finances As an owner, you have an obligation to vendors, employees, investors, lenders, the IRS, and others to stay on top of your business. You also need to know what’s happening with your finances at any given moment so you can make good, informed decisions about your future.
It’s also one of the rewards of business ownership – after all, if you’re running a for-profit enterprise, you want to see the profits grow!
Top 5 best practices for small business finances
There are many aspects to managing your business finances but these five top strategies will get you started today.
1. Always keep your business finances separate from your personal finances
This is required by the IRS for many business entities, including LLCs and corporations, but it’s still a good idea even if your business is a sole proprietorship. This way, it will be easier to do your taxes correctly and to clarify anything if you’re audited. It can also protect your personal assets if something goes awry with your business down the road.
As soon as you create your business entity, you should open a separate bank account for your business. This includes a business-only debit and/or credit card and, if needed, checks. If you’re using personal funds to launch your business, be sure to work with your accountant to ensure your owner-equity infusion is properly tracked.
If your business is already up and running but you’re still mixing personal and business expenses, you’ll need to meet with your accountant to take steps to fix the situation.
If your only option is to use a personal credit card for business expenses (which sometimes happens in the early years), then dedicate a credit card account to be used only for business expenses. This will create some separation between your personal and business finances.
2. Use financial software to track and manage your business finances
Whether you’re using a software program yourself or you hire a bookkeeper to manage day-to-day business finances, you’ll want to subscribe to a software program that’s tailored to the needs (and budgets) of small businesses, such as QuickBooks®, Xero®, or FreshBooks®.
There can be a bit of a learning curve when using the software so it’s important that your program is set up correctly from the start. Have your accountant set it up for you. But, don’t expect them to act as a bookkeeper for you, unless you’re willing to pay them for that service.
3. Create a routine to keep up with financial-management tasks
Keep up with regular financial tasks such as checking your inventory-management system, reviewing bank statements, and checking accounts payable and receivable. Committing to these tasks regularly (usually about 30 minutes a week) allows you to spot potential problems before they become major headaches.
It’s a best practice for all small businesses and it’s especially helpful if your business:
- has few or no employees
- is a start-up
- is going through major changes (like growing, pivoting, or downsizing).
4. Regularly review your business’s financials
A bonus of using financial management software is that you can generate financial documents – such as balance sheets, cash-flow projections, and profit-and-loss statements – in just a few clicks. Reviewing your revenue and expenses can help you spot opportunities to increase profitability and reduce or even eliminate the “expense creep” that happens to every business owner.
It’s also important to compare your expenses to the previous quarter and look for trends. Check on any expenses that seem to be rising more than you’d planned or expected. By gaining control over your financials, you can help maintain a profitable and financially healthy business.
5. Use business debt wisely
The right business loan or line of credit can help your business grow. If you don’t have reserve funds for an upgrade or improvement, you can explore the different types of funding that can support your project or opportunity. For example, say you want to buy a new oven or freezer. The best financing option may be different if you’re experiencing a cash-flow crunch due to prolonged payment terms from a contract with a government entity.
There are many great loan and credit options for small businesses – the key is to find the right option for you and your business.
More resources to help you learn and grow
Implementing financial best practices doesn’t have to be a puzzle and you don’t have to go it alone. There are free and low-cost resources available. If you need help, try:
- Small Business Development Centers (SBDCs): SBDCs can be found throughout the country, often on college campuses or in target business-development zones. They’re staffed with knowledgeable and experienced teams who can guide you as you launch and grow your business.
- SCORE: This organization offers free services to small businesses, including support for financial-management challenges and much more. SCORE offices are located throughout the U.S.
- Your Local Chamber of Commerce: Although there’s sometimes a fee for services, often you’ll gain excellent information and connections for a relatively low cost. These business-focused networking groups are also great sources of information on finance-adjacent topics, such as health insurance for small businesses.
Pursuit offers loans, lines of credit, and information for small businesses
At Pursuit, it’s our mission to provide small businesses with affordable financing and business resources that support your success. We also have more than 15 loan options and a line of credit for businesses in New York, New Jersey, Connecticut, Pennsylvania, and Illinois. If your business is located in our service area, contact us today to learn more.
