Some small business owners are already financial gurus, with MBAs, private sector experience, and a deep understanding of all aspects of small business financing.
This tutorial, on the other hand, is aimed mostly at business owners with little to no financial experience—those who opted to establish a firm because of a passion or a big concept, but are now unsure how to efficiently manage small business funds (or at all).
Take a look at this full tutorial if handling your business finances makes you feel entirely overwhelmed. We’ll lay down essential accounting terms, how to manage your credit ratings, how to apply for a business loan, and more—so you’ll have all you need to run your small business finances.
1. Keep your personal and business finances separate.
Before you can begin managing your business funds, you must first take a critical first step: you must separate them from your personal finances. What makes this first step so crucial?
For starters, keeping your business and personal finances separate is critical for both organizational and financial reasons—by keeping these finances separate, you’ll find it much easier to manage your bookkeeping and business tax obligations. Separating your business and personal finances, on the other hand, has legal repercussions.
When you segregate your finances in this way, your personal finances are protected in the event that your business runs into legal difficulties.
Open a Bank Account for Your Business
After all of this, you can open a company bank account to separate your personal and corporate finances. Choosing the correct bank account for your company is an important part of effectively managing your finances.
What criteria should you use to choose which business bank account is ideal for you? A variety of criteria should be considered, such as:
- The difference between a business checking account and a business savings account.
- There are several options for waiving the monthly service fee.
- Transactions that are included.
- Allowances for wiring.
- Limits on cash deposits
- ATM access is available.
- Online and mobile banking services are available.
Get a Credit Card for Your Business
Getting a company credit card is another important approach to keep your personal and business expenses separate. You’ll be able to make purchases for your business and just your business using this card. You’ll be able to streamline your bookkeeping and develop your business credit by using a business credit card. You can get a business credit card from the same company that provides your business bank account, or you can look into other choices.
2. Acknowledge Accounting in Business
Understanding the fundamentals of small business accounting is the next step in managing your small business finances. Although this may appear to be a challenging task—especially if you’ve never taken an accounting class—there are a few basic accounting concepts and paperwork that aren’t difficult to learn.
Furthermore, by examining these essentials, you will have a far better understanding of how accounting affects your business finances and, as a result, will be in a better position to select accounting software and, if required, hire an expert, for things such as create a pay stub, and help you with your taxes.in
Accounting Terms to Know in Business
As you go more into the area of small business financial management, you’ll notice a few keywords that keep cropping up. Many of the additional processes you’ll need to manage your business finances can be even more intimidating if you don’t understand the language. As a result, let’s start this part by going over some basic accounting terms:
Gross revenue, also known as total revenue, is the whole amount of money you’ve collected from clients in return for your product or service, before any deductions or charges (for example, rent, cost of products sold, taxes, and so on.)
Expenses are anything that prevents your gross revenue from going right into your pockets, such as rent, payroll, material costs for goods sold, taxes, interest on debt, utilities, and other running expenditures.
3. Business Taxes Must Be Paid
After you’ve separated your business and personal funds and arranged your books, the next step in managing your business finances will be to comprehend and comply with tax laws. Despite the fact that taxes are one of the most complicated and perplexing aspects of small business finance, neglecting to file your state and federal business taxes can result in the loss of your firm and even criminal charges.
As a result, here’s what you should know about business taxes:
Get a Federal Tax Identification Number
This number, also known as your employer identification number (EIN), aids the IRS in keeping track of your firm for tax purposes. You might think of your EIN as a business’s social security number.
Although not all businesses are required to obtain an employer identification number (EIN), there are specific scenarios in which you may be required to obtain an EIN even if you do not employ anyone—particularly if your company is organized as a corporation or partnership. You may check the IRS website to see if you require an EIN, and you can also apply for one through the IRS. However, even if you don’t require an EIN, there are advantages to acquiring one.
Understanding Business Taxes
The federal government imposes four sorts of taxes, and the type of business you operate dictates which taxes you must pay when forms and payments are due, and how you will file those taxes. Although not all of the following types of business taxes apply to every company, it’s vital to understand what they are and how they may affect your small business finances.
4. Take Control of Your Credit Scores
Understanding and controlling your credit ratings is the next step in managing your business finances. Whether it’s a property or equipment lease, a business credit card, or a small business loan, you’ll need credit at some time during the life of your company. Your personal and business credit ratings and histories will determine your capacity to obtain any type of business funding, and both are inextricably linked to how successfully, or poorly, you manage your small business money.
With that in mind, here’s what you need to know about maintaining both personal and company credit in order to optimize your small business’s borrowing alternatives in the future.
5. Recognize the Different Types of Business Loans and Financing Available
Finally, now that you’ve completed these four steps, you’ll be ready to take your company’s finances to the next level. It’s likely that you’ll need to take out a small business loan at some time in the future, whether it’s to deal with short-term cash flow issues or to fund your company’s expansion.
There are varied eligibility requirements for each type of company loan and lender, including minimum credit scores and annual income. As a result, you’ll want to learn about the different sorts of loans available and what you’ll need to qualify for them so that you may better arrange your business finances from the start and have a financial objective to work toward as you grow.
At the end of the day, it’s vital to realize that managing your business finances is a step-by-step process—you don’t have to become an expert overnight, and you’ll probably learn the most effective as your company grows. When in doubt, though, you might prefer the five foundations we’ve discussed:
- Keeping your personal and business funds separate.
- Taking care of your company’s bookkeeping and accounting.
- Understanding and paying your company’s taxes is essential.
- Keeping track of both your personal and business credit ratings.
- Understanding your alternatives for business funding.
Finally, no matter what area of your business finances you’re working with, you may live by three mottos when it comes to financial management: plan ahead, evaluate everything thoroughly and consult an expert or independent contractor when necessary.