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Many small business owners are talented and passionate, but that doesn’t mean they love to crunch numbers. If you’d rather leave the bank statements, profit and loss reports, and bookkeeping to someone else — you’re not alone. But, at the end of the day, the success of your business does come down to the financials. So, where do you start? Here are the basics of how to organize small business finances.
7 steps to organize your small business finances
If you know you need to get more organized with your business finances but aren’t sure where to start, here are seven steps that can get you moving in the right direction.
1. Separate business and personal expenses
The first thing to do is set up a business bank account that’s only used for business transactions. If you don’t have an employer identification number (EIN) and don’t want to get one, you can open a separate personal account for your business and use it only for business transactions. However, there’s a drawback to this approach that we’ll discuss below.
Why is a dedicated business checking account so important? Two key reasons.
- First, when you go to do things like review your cash flow, forecast for the future, or file taxes, it’ll be very easy to get the information you need. You won’t need to waste time sorting through transactions and you’ll be less likely to make accounting mistakes.
- Second, intermingling business and personal finances (including opening a personal account for business purposes) can create some liability issues. If you’ve chosen a business structure that grants personal protection from business debts and liabilities, mixing personal and business finances can be considered “piercing the corporate veil.” In other words, it could be grounds to hold you legally responsible for business debts and liabilities, despite having your business set up to protect you from them.
For these reasons, the ideal scenario is often to get an EIN and open a business checking account.
2. Create a budget
Next, to know what’s going on with your finances, you’ll need a budget. Like a personal budget, a business budget is a record of your income and expenses.
If you own a brand new business, take some time to brainstorm your foreseeable business needs. List everything you think you’ll need to get started and operate on an ongoing basis. If you’re an existing business, this step will be a bit easier as you can review your transactions from the past.
Some of the most common business expenses include:
- Payroll
- Employee benefits
- Wages paid to contractors
- Utilities
- Rent or mortgage payments
- Insurance
- Bank fees and interest
- Software and technology
- Supplies
- Raw materials
- Taxes
- Maintenance and repairs
- Marketing and advertising costs
- Depreciation and amortization
- Transportation and travel costs
- Training and development costs
- Equipment and machinery
- Legal and professional fees
- Startup costs (business registration, market research, product development, permits, licenses, trademarks, patents, professional services, etc.)
Be sure to separate your expenses into one-time costs, recurring monthly costs, and annual costs. Doing so will help you better understand when you’ll need the money for each expense. It can also help to note which costs are fixed and which are variable.
Once you have your expense estimates, look into your business income (or projected revenue for new business owners). If you’ve been in business for at least a year, you can look back to get a better idea of the amount of revenue you can expect in the year to come.
With your gross revenue numbers in hand, subtract your expenses to predict where your profit margins and cash flow will likely land.
Pro Tip: Check out our 4-step budget guide.
3. Track all financial activity using a system
A budget gives you a foundational understanding of your business’s financial situation. Finances, however, aren’t stagnant. They will fluctuate over time. As a result, you need to track them on an ongoing basis. You can do so manually or automatically with the help of a software program like Quickbooks or Wave (find more tech recommendations below). Either way, be sure you’re keeping a running record of all your cash inflows and outflows.
4. Schedule regular financial reviews
Next, it’s important to perform regular financial reviews. For example, you may want to do a brief check-in at the end of each week and a full review at the end of each month. During these check-ins you can:
- Ensure that you have sufficient cash flow to meet all of your financial obligations.
- Assess profit or loss for the month.
- Check that all tax obligations have been met and the necessary paperwork has been filed.
- Check inventory levels.
- Compare your expenses to your budget to see if you’re on track, above, or below.
- Analyze financial trends to understand if you’re heading in the right direction.
- Check that accounts payable and receivable have been settled.
By performing these regular reviews, you’ll be able to make informed business decisions on an ongoing basis. Further, you can notice and respond to any irregularities quickly.
Pro Tip: For bigger quarterly, half-yearly, and yearly check-ins, try these methods.
5. Build business credit
Next, business credit is an important part of a well-rounded financial plan, especially if you’re planning on taking out financing to grow. It can help you get business loans, along with favorable payment terms from vendors and suppliers.
If you don’t have any business credit yet, secured credit cards provide a good entry point. You don’t need credit to get approved but will need to put down a deposit. Once you’ve paid the deposit, the lender will often give you a credit line equal to your deposit amount. To build a positive credit line, you should then use the card for business purchases, make on-time payments, and keep your credit utilization down.
If you decide to go the secured business credit card route, look for a company that reports to at least one business credit bureau — although reporting to all three is ideal (Experian, Equifax, and Dun & Bradstreet). Additionally, pay attention to whether cards require a personal guarantee. A personal guarantee is a pledge that you’ll be personally liable for the debt if the business can’t pay, which can cause some undesirable mixing of personal and business finances.
6. Consider tools that can help you
Does all this seem like a lot of work? Well, you don’t have to do it alone. You can opt to automate some of the steps with tools, such as:
- Business credit score/financial health tracking: Tillful’s free business credit score service lets you log in at any time to get a snapshot of your business’s financial health. It also gives you free access to your Experian business credit score. Nav also provides credit report tracking.
- Payroll and accounting: Tools like Quickbooks, Xero, Freshbooks, and Wave can help with tasks like tracking expenses and income, paying employees and contractors, tracking time, tracking mileage, maximizing tax deductions, capturing recipes, and more.
- Invoice management: While many of the tools above will help you track invoices and drive collections, you may not need the other accounting features. If your business is invoice-heavy, and you solely need help with invoice management, consider Zoho Invoice or Square Invoices.
Cloud-based tools can be very convenient and efficient. You often sign up online, create an account, and connect your business bank accounts and credit cards. From there, you can log in from a desktop computer or mobile device and all your information will be there. However, it’s important to choose a company that is reputable so you can rest assured your data is secure.
7. Seek professional help if needed
Lastly, in some cases, it’ll be best to seek professional help. For example, if your business finances are complex (e.g. international operations, multiple revenue streams, etc.), you may need a financial advisor. Additionally, when tax time comes around, an accountant or tax advisor can help to ensure you maximize your deductions/credits while staying compliant with tax law.
Further, some business owners would just rather not handle the financial side. If it’s not your strong suit, you don’t like dealing with it, or you just don’t have time, hiring a trusted professional can help to remove many of the responsibilities from your plate. You’ll still want to check in and keep tabs on the financial health of your business, but you can rest a bit easier knowing a pro has it covered.
You can also go for a general business coach or mentor. Your local SCORE and SBDC offices are good places to start.
Frequently asked questions about business finances
Here are answers to a few frequently asked questions about business finances.
What is the financial structure of a small business?
Financial structure comes into play for small businesses when they take on investors. Typically, investors invest in businesses in one of two ways; they lend the money to owners or give them money in exchange for equity. In the case of debt, the business owner must repay the amount plus interest. In the case of equity, the investor owns a percentage of the company and its future profits. Financial structure refers to the mix of debt and equity that a small business has taken on to finance its operations
How should I organize my business expenses?
You should use the organization method that works best for you. Cloud accounting software solutions are growing in popularity. After syncing with your bank accounts and credit cards, all of your transactions are automatically loaded into the program and organized.
If you prefer to track your expenses manually, a spreadsheet program connected to the cloud (e.g. Google Sheets) can work so that you have a backup if anything happens to your computer. That said, when tracking manually, it’s important to add your expenses as you go and to double-check your work.
Do business finances impact your credit score?
Business finances will typically impact your credit score, but the business credit bureaus don’t track the activity in your bank accounts. Instead, if your cash flow and profits are suffering, you may find it harder to keep up with all of your bills. When you miss payments or max out your credit lines, that’s when your credit scores will be impacted. Further, if you file for bankruptcy, have any liens, or have accounts in collections, those will also hurt your credit score.
Set your business up for long-term success
Staying on top of your business finances is key to long-term, sustainable success. While businesses may experience seasons of rapid growth where capital is plentiful, they will also likely experience leaner seasons. The importance of financial organization and optimization often becomes critical during those downtimes. Following steps like these can prepare you to thrive (or at least survive) through both the highs and lows.
