When you start a small business, you go into it knowing there will be a lot of work that goes on behind the scenes. Managing your small business finances may not be a task that you enjoy the most, but it is an important element for years of continued success. Since you may be a beginner at small business finance management, we’re highlighting the key actions that should be taken right from the start, whether you’re tackling this on your own or outsourcing to a financial partner.
Separate Your Business & Personal Finances
A crucial step in small business finance management, especially for businesses just getting off the ground, is keeping the business’s finances separate from your personal finances. You may think that this is as simple as keeping receipts separated, but there is more that you can do to create a more distinct separation.
Your first step is to apply for an Employer ID Number (EIN). Not only will this serve as your tax identification during tax season, but it can also be used as a business ID when you open a bank account.
At a minimum, you should open a business checking account and apply for a credit card. Not only do these accounts make your business look more professional, they also:
- Minimize bookkeeping areas
- Isolate business expenses, which can be tax-deductible
- Shield you from personal liability for outstanding debt
- Help you build a credit history for your business.
Know Your Business Credit Scores
Everyone has a personal credit history that is used to calculate a credit score. This score is used by lenders to evaluate your credit worthiness. Small businesses also have a business credit score that is built upon their history of carrying and repaying debt responsibly.
Knowing your business credit score is another important step in managing your small business finances. A poor credit score will limit your opportunities to obtain financing, purchase insurance, find real estate, and carry debt with vendors. Meanwhile, a high credit score will make these business transactions much easier.
If a low business credit score is holding you back, you might want to put spending plans on hold until you can improve your score. Consistently paying your bills on time and in full over the course of several months can help raise your credit score to an acceptable level.
Understand Important Business Documents
Not everyone who runs a small business has a head for finance and bookkeeping. Many choose to outsource these tasks to accounting professionals. But, as the business owner, it’s still important that you work with your accounting partners to ensure that you have a clear picture of your business’s key financial statements. Managing small business finances includes a periodic review and understanding of the following:
- Balance Sheet — This a snapshot of your business’s assets, liabilities, and equity, which are used to calculate your business’s net worth. In a “balanced” situation, your total assets would equal liabilities plus equity.
- Income Statement — This is a breakdown of business revenue and expenses over the course of the year, which determines if your business had profits or losses for the year. This often called a P&L (profit and loss) statement.
- Cash Flow Statement — This tracks the inflow of revenue and outflow of expenses, showing you the amount of cash your business has on-hand during a specific period of time (each month or each quarter).
- Revenue Forecast — When you’re making decisions about the future of your business (like upgrading equipment or hiring employees), understanding your revenue forecast gives you a good idea of what you can afford. Your revenue forecast is an educated prediction, using past performance as a guide, of the revenue that you will earn in the future.
Fine-Tune Your Billing Strategy
Another key component of managing your small business finances is implementing a billing strategy that ensures you have cash coming into your business in a timely manner.
Here are a few ways you can ensure prompt payment from your customers and maintain a healthy cash flow:
- Never delay invoicing. Whatever payment terms you’ve set in place, nothing will happen until the invoice is out the door.
- Offer discounts for early payment. Many small businesses use invoicing strategies such as 2/10, Net 30. This provides your customers a 2% discount if they pay within 10 days, but requires full payment within 30 days.
- Consider shorter payment terms. If you require full payment in 15 days, you may have customers who pay late, but in most cases, you will receive full payment sooner than the typical 30-day window.
- Digital payments are the quickest way for customers to pay. Adding a digitized invoicing and payment process allows customers to pay with minimal effort.
Whether you’re opening your first small business banking account or applying for small business financing, the experts in our Business Services Division can help you with the products and services you need to manage your small business finances.