21 Tips for Managing Your Small Business Finances

Every small business owner must stay on top of one thing: managing the money. Cash flow is all about how money moves in and out of your business. And your goal should always be to keep cash in your business operating account as long as possible. Managing your small business finances requires a specific skill set. It is crucial to surviving a volatile world of small business ownership. 

Here’s the deal: unless you immediately get paid before shipping a product, you are always extending credit to your customers, with the goal to get paid as agreed. Typically this is net 30, but often it creeps to 45 or even 90 days, which will strangle your cash flow. 

Entrepreneurs need is to be equipped with good money management skills in order to sustain and grow a business. It is crucial that you keep accurate records of your income and costs, although not every business owner is trained in small business finances.

21 Tips for Managing Your Small Business Finances

If you are new to small business finances, these tips will get you on the started on the right track.

1. Hire an Accountant

An accountant is a business advisor who will help you manage your small business finances. If you don’t know how to hire an accountant, keep this in mind: know what kind of accounting services you need. You can get a bookkeeper for basic accounting services, an accountant who has a degree in accounting for more complicated accounting and payroll services, or a certified public accountant who can help with tax planning and also prepare taxes. All of these people can share strategic accounting advice.

2. Invest in Cloud-Based Accounting Software

Web-based accounting software provides you with real-time insights, and you can update, track, and access data from anywhere at any time. Whether you’re at the office or traveling, you can review your accounting records or create an invoice from anywhere. It also allows you and your accountant to access the records, you can import your banking and credit card statements, and best of all, if you want to fire your accountant, you can move on to a new provider at any time.

3. Properly Manage Your Accounting Records

This is a follow-up to tip #1. Someone needs to stay on top of your expenses and receivables weekly. Hint, hint… it should be an accountant. Don’t wait until tax time to start pulling your financial records together.

4. Use Your Financial Statements Strategically

Learn how to read your financial statements. Your accountant can teach you if you don’t know how. There are three kinds of financial statements: the cash flow statement, the income statement or profit and loss statement (P&L), and the balance sheet. The cash flow statement records operating activities, financial in/outflow, and any investments. The balance sheet provides information related to the company’s assets, liabilities and shareholder’s equity. The income statement reflects the revenue earned within a specific period of time. You need up-to-date financial information to make informed business decisions.

5. Review Your Financial Position Monthly

By the 15th of the month, you should know how well your business did last month. You’ll learn this information from reviewing your monthly financial statements, including the balance sheet, cash flow statement and income statement, which should be prepared by your accountant. 

6. Create Money Rules

How you pay bills in your business should be established by you and not just paid out as soon as you receive an invoice. I pay vendor invoices twice a month—on the 15th and the 30th: no one gets to demand payment. Knowing when I will make vendor payments helps me manage my cash flow a lot better. 

7. Use a Budget

Every fall, you should prepare your business budget for the coming year. Don’t make spending decisions without reviewing your budget. This will help you avoid the ‘bright shiny object’ syndrome. You should not make a move if it’s not in the budget.

8. Review Your Costs

Keep track of all of your small business expenses monthly and quarterly. Things like labor, inventory, sales commissions, and marketing costs can add up quickly, but reviewing them regularly allows you to fine-tune where your money is going and will allow you to cut back if needed.

9. Create Sales Projections

Having clear sales projections is important. You must have an idea about how much revenue should be coming in monthly. Then you can set weekly sales goals for yourself and your team. 

10. Stay on Top of Invoicing

Send out invoices as soon as services are provided. Always try to get a deposit if you are a service-based business. Send out electronic invoices that allow credit card, Paypal, or ACH payments. Set payment terms in your contracts and make sure it is also on every invoice. Be willing to give a small discount (2%) for Net 10 or Net 15 payments, but never for Net 30—businesses are supposed to pay in 30 days. 

11. Always Follow Up on Invoices

If you use electronic invoices, you can set a reminder to go out two days before the invoice is due. You can create reminder email templates for follow-up on from your CRM as well. No matter what, collections activity starts on Day 31 with any past due invoice. It’s best to phone and email. Try to get a name in accounts payable as the start of the engagement to get some help faster.

12. Keep Personal and Business Finances Separate

It is always best to keep your personal and business finances separate. Get a business credit card and put all related expenses, such as travel and recurring subscriptions, on it. Otherwise, use your business debit card or a Paypal account to pay for materials and vendors. This should help you keep your business expenses separate from personal ones.

13. Open a Profit Account

You will also do well in opening a profit account for yourself. I learned this from the book Profit First by Mike Michalowicz. He suggested that we should all transfer a certain percentage (1-10%) from each payment the business receives. He advises us to set it up in a separate bank that’s not easy to access. We all work too hard, and too many of us skip paychecks to pay the business bills. This way, you’ll always have a little something for yourself, and the business needs to operate on what’s left. 

14. Establish an Emergency Fund for Your Business 

Just like you have an emergency account for your household, you need one for your business too. Rainy days come, customers pay late, unexpected expenses do happen. You want to make sure your business always has a back-up plan. You can use this money to pay your taxes too if needed.

15. Apply for Credit before You Need It

Banks do not move quickly, so don’t wait until you are up against the wall needing cash to apply for a loan or line of credit. As soon as you get a big contract, go to the bank and apply for a line of credit. Keep in mind: you can only borrow 10-15% of your gross revenue.

16. Use a Line of Credit Carefully

I’ve seen a lot of business, including my own, get into trouble with this type of loan by not using a line of credit properly. Lines of credit are for short term cash flow issues and should be paid down immediately once the cash shortage is resolved. Don’t treat it like a credit card, because the bank can pull your line of credit at any time.

17.  Cut Costs Quarterly

It is important to keep your expenses in check, without sacrificing customer experience. Look for a way to cut your fixed and variable costs. Look for a co-working space instead of a professional office. Cut marketing expenses that don’t deliver. Try bartering your services with other professionals and cut costs.

18. Monitor Your Profit Margin

It is crucial that you look at your company’s financial performance in comparison to the past years to monitor your profit margin. It should increase every year. It not about gross revenue it’s about profit. 

19.  Measure Marketing Performance 

You should not spend money on marketing efforts that you can’t tie back to sales. If you are investing in PPC, or pay per click, ads, there’s a direct cause and effect. But you also need to calculate things like cost per lead (cpl) and cost per sale (cps), so that you understand the financial side of your sales efforts.

20.  Do Tax Planning 

Whether it is tax planning for the current or next financial year, or figuring out the right time to file your taxes for the current year, a tax planning expert can be worth their weight in gold. With all the tax code changes that happen each year, you want to be strategic and avoid paying more taxes than you need to. Talking to a tax planning expert can be quite beneficial.

21. Keep Your Taxes Paid

Don’t mess with the IRS—it’s not worth it. Your state tax authority can be brutal too. They always get their money. Pay your quarterly taxes, and make sure you use a payroll service to keep your quarterly payroll taxes up-to-date. Keep in mind business taxes are due March 15th of every year, not April 15th.

Don’t let your business suffer due to poor cash flow management. When it comes to hiring an accountant, look for someone who works with small businesses. It could be a bonus if they have experience in your industry too. Do not make business decisions without up-to-date financial information. Keep the above tips about small business finances in mind, and your business will be a-flush with cash.