Starting a business is nothing like entering any kind of career path.
When you start a small business, you’ve also entered a new world of finance. The nature of your income, expenses, and even taxes are now completely different.
It can feel like a whole whirlwind of questions, leaving you spinning with what to do first.
So, how do you make sure you’ve got all the bases covered when it comes to small business finances?
How Do Small Businesses Manage Finances?
Depending on the complexity of the small business, they would use a mix of:
- Personal research and decision-making
- Consulting finance and tax professionals
- Business finance apps
- Software and advanced tools
Before getting into the complexities of these decisions and tools, let’s go over the basic tips anyone getting started with small business finances should know.
Tips for Managing Small Business Finances
1. Pay Yourself
Running a business is difficult and expensive, especially at the start.
So, it can be tempting to put more than you really should back into the business.
However, you need to make sure your personal income is adequate as well. If you fail to pay yourself, you’ll be in especially dire straights should your business fail.
As a matter of small business accounting, one way to approach this issue is to treat yourself as an employee and compensate yourself accordingly. Consider your role in your business and pay yourself suitably for it. Then you can use all the remaining funds to help your business grow.
2. Reinvest Profits
Investing in growth is key to small business success.
So, after you’ve paid yourself for your efforts, the next priority is creating new growth opportunities. This can mean investing in human resources, hardware, or anything else that brings returns.
Saving is a long-term small business goal. During the startup phase, the key is to establish your business as a competitive force in its market. You can create new opportunities by enhancing your business’s:
- Talent (high-quality employees)
- Level of service
- Delivery processes
- Efficiency through tools and software
Sitting on savings or paying yourself the entirety of your profits simply won’t open the doors your business needs to thrive in the long term.
3. Take Loans When You Need Them
Loans are never the ideal first choice, but they are often necessary. This is perhaps truer in business than it is in personal finance.
Business management includes far more high-ticket expenses than does personal finance. Getting a mortgage and perhaps an auto loan are the main major expenses you must prepare for personally.
However, young businesses often need a sudden and large influx of capital for items such as:
- Expensive hardware
- Heavy machinery
- Large and expensive vehicles
- Comprehensive software products and subscriptions
- Specialty equipment
Even the smallest businesses with the lowest overhead will have unique needs that will often require loans. Sometimes, you’ll want to use loan funds to ensure consistent cash flow so you don’t have trouble paying bills, employees, and suppliers.
The latter is an important reason to become comfortable with the business financing world. The consequences for not paying employees and bills on time are severe.
4. Maintain Good Credit
Business credit is measured differently than personal credit. While these two are scored separately, it’s in your best interest to keep both of them high.
Credit is important when you’re starting a business, then may become a bit less important over time. However, there comes a time when you need access to financing again.
Depending on your industry, you may need to rely on credit at some point in the future for:
- Acquiring new commercial real estate
- Building additions and improvements
- Additional insurance coverage
- Substantial software, vehicle, machinery, and other investments
With a poor business credit score/history, all of the above becomes more difficult and expensive to acquire. In addition, it may become more difficult to get commercial leases with bad business credit.
Fortunately, business credit works very similarly to personal credit. You can increase your business credit score by:
- Repaying debts on time
- Having diverse credit accounts
- Maintaining low levels of debt relative to revenue
- Only taking on affordable debts
Even if you don’t need business financing at the start, it can make sense to take on some business debts. Careful management of business credit cards and lines of credit can increase your business credit score at a minimal cost.
5. Understand Small Business Tax Obligations
Business taxes are different than personal taxes, of course. You will want to take advantage of tax planning strategies to keep as much capital as you can inside your business.
When you’re just getting started, try to remember to:
- Keep all receipts related to business activities
- Use applicable business-use-of-home deductions
- Claim non-capital losses strategically
- Use RRSP contributions strategically
- Incorporate, if you haven’t already (it will help you minimize your tax obligations)
- Seek tax assistance to maximize your tax efficiency
6. ROI Over Expenses
Yes, all expenses should be considered carefully.
But a better shift in thinking for a small business owner is to view expenses in terms of projected ROI. (Return on Investment)
Not all expenses are equal, and they should each be judged based on their potential ROI. Focusing on expenses that improve your ROI will likely produce the best long-term balance.
7. Get Paid
Last but certainly not least, you need to make sure your cash flow is adequately consistent.
There is a big difference between:
- Automatic direct deposits from your employer
- Business invoices you send
There are far more consequences for an employer who fails the first point than for a business that pays late. Business-to-business payments can take a long time to be made. Some businesses aren’t as functional as yours, and they may take weeks or even months to get to your invoice.
The discrepancy between income and day-to-day operational expenses can be one of the most difficult aspects of small business finance. Most small businesses have at least one regular client who is slow to pay invoices.
In some cases, you will need to come up with creative solutions to these issues to ensure you get paid.
Having too much cash tied up in invoices that are not being promptly paid will inevitably cause stress and cash flow shortcomings. Lack of capital is one of the better-known causes of small business failure. So, you will want to think through how your real income will get to you early on.
Understanding Your Small Business Finances
Understanding business finances takes some time and research.
You will end up familiarizing yourself with a new environment, new concerns, and new financial statements.
In most cases, this will mean it’s a good idea to seek professional assistance where you feel you need it. Mistakes can be costly, so there’s nothing wrong with getting all the help you can.
Another way to alleviate your burden is to leverage technology to make business finance easier. Using professional accounting software is highly recommended.
Use a Small Business Money Management App
Familiarizing yourself with software and advanced business finance tools isn’t necessary for all small businesses.
But small business bookkeeping needs can actually be quite comprehensive. However, there are small business finance apps that can help with all those tasks.
Understanding Small Business Finances
You will learn your most valuable small business finances lessons through experience.
However, going in with the tips we’ve covered in mind should help you ease the stresses of managing your small business finances!
Editor’s note: This article was originally published Jan 26, 2022 and has been updated to improve reader experience.
Photo by Ketut Subiyanto from Pexels
