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Mar 20, 2024 · 9 min read

How to manage finances of a small business

Want to master the art of financing? Read this guide for tips to manage the financial health of your business!

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As a small business owner, your financial management strategy can be the make-or-break factor of your business. In the UK, approximately 400,000 new businesses start trading each year. However, only two-thirds of these businesses survive the first three years, and even fewer - only half - survive five years. The primary culprit for these failures is not poor quality of services or a lack of customers. Instead, often this is a lack of cash.
This comprehensive guide aims to equip small business owners with the knowledge and tips to manage their finances effectively. It's for those of you who have had an idea and decided to pursue it, but now need a little help getting to grips with the financial aspects of running a business.

Monitoring and managing small business cash flow

Cash flow is defined as the total amount of money that moves into and out of your business over a specific period. It's essentially the lifeblood of your business, enabling an organization to function and grow. Therefore, any successful business will have a strong system in place to manage and monitor it. Below are the few things you will need to know beforehand:
  • Positive cash flow: this happens when your business receives more income than it pays out in expenditure. Maintaining positive cash flow is critical for your business's survival as it ensures you can pay your bills on time and meet any unexpected costs.
  • Negative cash flow: there may be periods where your business experiences negative cash flow, for example, if you invest in a new piece of machinery or a customer's payment is overdue. During these periods, you may need to rely on a bank overdraft or short-term loan to cover the shortfall. However, as long as you've planned for this and your business returns to a positive cash flow position, it shouldn't pose a significant problem for your business.
Here are a few strategies to help you manage the cash flow correctly.

1. Create a cash flow statement and forecast

A cash flow statement and forecast are simple financial documents that give you a snapshot of your monthly flow of cash. They can help you keep a close eye of cash going in and out of your business. You can easily view this data with help of Enty finances panel, where all of the incomings and outgoing are conveniently unified in one place. The net cash flow feature provides insights into your company's financial snapshot by reflecting the difference between incoming and outgoing money. This allows you to analyze trends, identify patterns, and make data-driven decisions. The dashboard can be customized to display data for different time periods, providing you with a clear view of your business's financial performance.

2. Set appropriate payment terms

Think carefully about the payment terms you offer to your customers. If granting extended payment terms impacts your cash flow, you may need to reconsider your terms or find ways to incentivize faster payment.
Ensure customers understand your payment terms from the outset. Make these terms clear and concise and provide them in writing to avoid any confusion or disputes down the line.

3. Be selective about who you do business with

Consider conducting credit checks on new customers before agreeing to work with them. This can protect your business from cash flow issues caused by late or non-payments.
Getting to know the people who handle payments can help reduce the likelihood of payment delays. Making sure your invoices are sent to the right place and contain all the necessary details is a simple way to minimize potential delays.

Understand financial documents

To effectively manage your small business finances, it's essential to understand the key financial documents. These documents provide valuable insights into your business's financial health and help you make informed decisions when it comes to accounting.
The three main financial documents you should be familiar with are:
  • Balance sheet: a balance sheet provides a snapshot of your business's financial position at a specific point in time. It includes your assets (what your business owns), liabilities (what your business owes), and equity (the difference between assets and liabilities). The balance sheet helps you assess your business's ability to pay bills and make important financial decisions.
  • Profit and loss statement: also known as an income statement, the profit and loss statement shows your business's revenues, expenses, and profit or loss over a specific period. It provides insights into the profitability of different aspects of your business and is often reviewed by investors and lenders.
  • Cash flow statement: the cash flow statement summarizes the cash inflows and outflows of your business over a specific period. It helps you understand how much cash you have available to pay bills and grow your business.
Understanding these financial documents will enable you to track your business's financial performance, identify areas for improvement, and make informed financial decisions.

Small business accounting

Small business accounting involves several essential elements that can sometimes feel overwhelming. However, these tasks are crucial for keeping your business compliant and for generating valuable financial insights.
Now that we’ve talked about the key documents you might need, it’s time to learn about the accounting basics principles and rules. They are what can help business owners to maintain accurate financial records and ensure compliance with tax regulations.

1. Cash basis vs. accrual basis accounting

Decide whether to use cash basis or accrual basis accounting. Cash basis accounting records revenue when it is received and expenses when they are paid. Accrual basis accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash is exchanged.
Choose the accounting method that best suits your business's needs. Cash basis accounting is simpler but may not provide a complete picture of your business's financial performance. Accrual basis accounting is more complex but offers a more accurate representation of your business's financials.

2. Separate business and personal finance

One of the first steps in managing your small business finances is to separate your business and personal finances. While it may be tempting to use your personal accounts for business expenses, mixing the two can lead to complications.
By opening a separate business bank account, you can keep your business transactions separate and have a clear record of business-related expenses. This will make it easier to track your business finances, claim deductions, and provide documentation in case of an audit. If you need a place to view all of the bank account balances in a convenient way and real-time updates - Enty is your go-to.

3. Use accounting software

Consider using accounting software to streamline your financial management processes. Accounting software allows you to track income and expenses, generate financial reports, and manage invoices and payments. Look for software that gives quick access, integration with your bank accounts, and customizable features to meet your business's specific needs.
Enty's Finances service offers easy bank account management for your small business. With one seamless control panel, you can link up to 1,500 international banks and access real-time information about your account balances and transactions. This eliminates the need to log into multiple bank accounts separately, saving you time and effort.
Moreover, you can select or unselect a specific account to get a precise picture of your business finances and even look for a specific transaction or add it manually if needed.

4. Seek professional help

If you're not comfortable handling your business's accounting on your own, consider hiring an accounting professional. An accountant can help you set up your financial systems, ensure compliance with tax regulations, and provide valuable financial advice. They can also assist with tasks such as bookkeeping, tax planning, and financial forecasting.
Following accounting best practices will help you maintain accurate financial records, make informed financial decisions, and ensure compliance with tax regulations.

Planning for and paying taxes

Proper tax planning and compliance are crucial for small businesses. Here are some tips to help you plan for and pay your business taxes:
  • Set aside funds for taxes: set aside a portion of your business income each month to cover your tax obligations. This will prevent financial strain when it's time to pay your taxes.
  • Understand your tax obligations: understand your business's tax obligations based on its legal structure. Consult with a tax professional or refer to IRS guidelines to ensure you're aware of all applicable taxes and filing requirements.
  • Make estimated tax payments: if you expect to owe more than $1,000 in taxes for the year, you may need to make quarterly estimated tax payments. Consult with a tax professional to determine the required payment amounts and due dates.
  • Keep accurate records: maintain accurate records of your business income, expenses, and deductions. Proper record-keeping will ensure that you can support your tax filings in case of an audit.
  • File on time: file your business tax returns on time to avoid penalties and interest charges. Mark the relevant tax filing deadlines on your calendar and set reminders.
By planning and preparing for your business taxes, you can avoid last-minute stress and ensure compliance with tax regulations.

Exploring your small business finance options

Whether you need funds to start a new venture or expand your existing business, exploring small business loan options can provide the financial support you need.
There are a variety of finance options available to small businesses, including bank loans, crowdfunding, invoice financing, business credit cards, small business grants, venture capital, and more. Consider different scenarios carefully to find the best fit for your business's needs. Here are some key considerations:
  • Research lenders: research different lenders and their loan products. Consider traditional banks, online lenders, and government-backed loan programs. Compare interest rates, loan terms, and eligibility requirements to find the best fit for your business.
  • Prepare financial documents: gather the necessary financial documents required for loan applications. This may include business financial statements, tax returns, bank statements, and business plans. Having these documents readily available will streamline the loan application process.
  • Improve your creditworthiness: maintain a good credit score and demonstrate strong financial management practices to increase your chances of loan approval. Pay bills on time, manage your debt responsibly, and maintain accurate financial records.
  • Seek professional advice: consider seeking advice from a financial advisor or accountant when exploring small business loan options. They can provide guidance on selecting the right loan product, help you navigate the application process, and ensure that you make informed financial decisions.
Exploring small business loan options can provide the capital necessary to fuel your business's growth and support your financial goals.

To salary or not to salary?

As a small business owner, it's important to pay yourself a salary. While it may be tempting to reinvest all profits back into the business, paying yourself a regular salary has several benefits. It allows you to cover your personal expenses, build your savings, and ensure financial stability.
Consult with your accountant or do research to determine the best way to pay yourself, whether it's through a salary or a draw. Paying yourself, even a small amount, from the beginning will help you establish good financial habits and ensure that you have personal financial security.

Tips for managing small business debt

Debt can be a useful tool for starting and growing your small business, but it's essential to manage it effectively to prevent it from spiraling out of control.

1. Create a rainy day fund

Having some savings set aside for unforeseen costs can help protect your business from cash flow issues.

2. Cut unnecessary spending

If debt is becoming a problem, there may be areas where you can reduce spending without negatively affecting your business operations.

3. Increase your revenue

There may be simple ways to increase your revenue that you haven't considered. For example, offering an early payment discount to customers could boost your cashflow.

4. Consider refinancing

If you're repaying a business loan at a higher than current market interest rate, refinancing could help reduce your monthly repayments.

5. Negotiate with suppliers

Negotiating discounts or more flexible payment terms with suppliers can help improve your cash flow.

6. Manage and boost your credit score

A better credit score can help you access more affordable credit, which can be beneficial if you need to borrow money.

Last thoughts

As we can see, managing the finances of a small business requires careful planning, attention to detail, and adherence to accounting best practices. By following the tips and strategies outlined in this guide, you can effectively manage your business finances, make informed financial decisions, and set your business on a path to success.
With Enty's Finances service, you can streamline your bank account management, gain insights into your financial health, and simplify transaction management. Start taking control of your small business finances today.
Take control of your Finances with Enty
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