Managing a business can be very overwhelming, especially if you have limited experience in the private sector, or have not gotten an MBA. This guide will help you comprehend the main steps of managing and operating your small business.
Steps to managing the finances of a small business
- You Should Have Separate Accounts for your Business and Personal Finances
There are two important advantages to separating your business and personal finances. First, filing taxes is significantly simpler when everything is separate. Otherwise when it comes time to file taxes you will have to go line by line through your expenses for the year and categorize every line. This can be extremely time consuming and it is not always so easy to remember every single personal and business expense over the course of a year. The second is Legal. By keeping your finances separate, your personal finances will be protected from any liability or legal issues that arise in connection with the business.
- Open a Business Bank Account
Setting up a Business Bank Account is the easiest and most common way to separate your finances. There are several factors you should be aware of as you choose which bank to work with. You should understand the difference between a checking and a savings account, and whether you need just one or both. Learn about the fees that you will be subject to and how to avoid them. Factors like wiring allowances, ATM availability, Mobile or online banking apps should be kept in mind as well. It is important to research multiple options before making a decision to get the best banking solution for you and your business.
- Get a Business Credit Card
Having a separate credit card will help you keep your business purchases separate from your personal and build your business credit. There are various different business credit cards available, review the benefits and fees that come with the card and make sure you choose one that is best for you and your business.
- Business Accounting
In order to manage the financials of your business it is important to understand the basics of small business accounting. A good place to start is the terminology, such as gross revenue, expenses, net profit, cash flow, and more. If necessary you should consult a professional to learn how your accounting impacts your business finances. It may be easiest to use an accounting software program to start or you may find it beneficial to hire an accountant, especially in the early stages of your business.
- Keep Your Documents Organized
Keeping documents organized will help you run your business more efficiently. It will allow for your accountant to easily file your business taxes, apply for business financing, and enable you to follow your company’s revenue, expenses and profit. The four main documents that every small business should be familiar with are a balance sheet, income statement, cash flow statement and revenue forecast. There are multiple software programs you can use to organize and keep track and file your business documents.
- Pay Business Taxes
Calculating your business taxes can be a daunting undertaking, but properly paying them is one of the most crucial things you need to do as a business owner. Failure to do so can result in fines and penalties, all the way up to losing your business or facing criminal charges.
This is what you need to know about filing your business taxes: You will first need to obtain a federal tax identification number. This is known and referred to as EIN (employer identification number). This number is what the IRS uses to keep track of your business. It is also important to understand your federal business taxes. Depending on the entity, type of business you operate, and revenue you bring in that will determine your tax responsibilities. Taxes that fall under the federal business taxes are; income tax, self-employment tax, estimated tax, and excise tax. Additionally most states require additional state taxes, which will require you to pay income and employment taxes for your business. You should consult with a tax professional before you start operating your business to ensure that you are fully aware of all the different taxes you will be subject to and when and how to pay them.
- Managing Your Credit Score
Almost all companies at some point require good credit to qualify for things like business credit cards and financing, as well as some one-off investments like equipment, property, or inventory. In order to maintain your credit score it is important to follow these steps:
- Pay bills on time
- Avoid loan defaults, bankruptcy, judgments, collections, foreclosures, and other actions that will lead to negative marks on your credit
- Use your credit cards wisely, keep your balance under 30% of your limit, lower if you can, and definitely do not max it out
- Monitor credit reports regularly and notify the credit bureaus if you see anything that you do not recognize
- Managing Your Business Credit Score
As a business owner, on top of having a solid personal credit score, you will also want to establish and maintain a good business credit score. Once obtaining an EIN, you will be able to establish a business credit score, which will show lenders and other potential creditors that your business can responsibly handle its debt and overall finances. If you already have a bad credit score and want to improve it, Premium Merchant Funding offers credit counseling services by experienced credit repair analysts who can help you develop a plan to improve your business credit score.
- Understand Your Business Loan and Financing Options
Based on the type of loan you are looking for and the lender you apply with, there will be slightly different requirements, but generally they include fundamental financial metrics of your company, like credit score and revenue. Since the 2008 financial crisis, lending options from traditional banks have been harder to get, but are still available to companies with great financial metrics.
Regardless of your background or experience, business finances are one of the more stressful aspects of running a business. Keep in mind that you can learn as you go, and you do not have to be an expert from day one. As long as you follow the tips we have given here, and are not afraid to consult an expert when you are unsure, you will be well on your way to success!