How to manage your business finances: 10 tips for small businesses

Understanding how to manage finances in a small business can feel daunting, especially if you don’t have a finance background. But we know small business owners often wear a lot of hats, including CFO! This article will offer small business money management tips, so you can avoid penalties, secure funding, and make informed business decisions—all without an advanced degree.

What is financial management in small businesses?

No matter how big or small your business is, the basic definition of financial management is the same—it’s the responsible management of your money to ensure regulatory compliance and long-term sustainability of the business. It’s everything from budgeting and bookkeeping to cash flow and debt management. Budgeting helps you allocate resources effectively and plan for the future, while managing cash flow ensures that you have enough cash on hand to pay the bills. Effective debt management means having a healthy balance of new debt and existing liabilities to avoid overextending your finances.

5 benefits of properly managing business finances

• Increase profitability: Yes, you have to spend money to make money, but finding cost-saving opportunities is just as important. By closely monitoring your spend, you can find ways to save, which directly enhances your business’s profitability.
• Improve planning and sustainability: Effective financial management means you can create accurate forecasts and set realistic goals, ensuring you’re set up for sustainable growth and ready for market fluctuations.
• Reduce accounting errors: Careful financial oversight and accurate record-keeping minimizes errors in accounting and leads to more reliable financial reports and smoother audits.
• Enhance cash flow management: You never want to be caught without the cash on hand to cover operational costs or take advantage of growth opportunities. Properly managing your finances helps your cash flow stay steady and predictable. 
• Strengthen financial decision-making: Making informed business decisions, like when it’s time to launch a new product or slow down on hiring, is easier when you have a clear picture of your financial standing.

10 tips for managing small business finances

Effective financial management is key to the long-term success of any small business. Make sure you’re on the right track with these small business money management tips:

1. Understand key financial statements

Get to know your business's balance sheet, income statement, and statement of cash flows. These documents provide a window into your financial health, so you can make informed decisions and track performance. 

2. Separate personal and business finances

Tangling up your personal and business finances is a recipe for confusion and even legal issues. Do yourself and your CPA a favor by keeping separate accounts and carefully tracking expenses. This simplifies bookkeeping, taxes, and helps in accurate financial analysis.

3. Pay yourself

On that note, remember to pay yourself a fair salary! You can’t keep a business running if you’re not being compensated for your hard work. 

4. Understand your cash flow

Keep a close eye on your cash flow to make sure you have enough liquidity to meet your short and long-term obligations. By regularly reviewing your statement of cash flows, you can anticipate and address any potential shortages.

5. Automate repetitive tasks with finance management software

Put invoices, expense tracking, and payroll on autopilot with financial management software. This way, you can reduce errors, save time, and focus on running your business.

6. Build your business credit score

Establish and maintain a strong business credit score by paying down debt and avoiding high interest rates that you can’t afford. With a good credit score, you can secure financing to grow your business when and how you want. 

7. Invest in growth

With proper financial management, you can allocate funds to invest in growth—whether by reinvesting profits or taking on strategic debt. This way, you can take on new projects, buy necessary equipment, or hire new talent. 

8. Streamline tax payments

Don’t wait until the end of the year to manage your taxes. By switching to quarterly or even monthly tax payments, you can avoid financial stress during tax season and maybe even reduce your tax burden with deductions and credits.

9. Monitor your books

It’s important to keep a close eye on your financial records to ensure accuracy and flag any irregularities. Set aside a regular time to check your general ledger so nothing falls through the cracks and you can make adjustments as needed. 

10. Establish financial protocols and plans

No matter how small your business is (yes, even you solopreneurs), developing and enforcing your own financial protocols and plans can lead to better financial management habits and protect your business from potential risks. Protocols can include things like setting and sticking to a budget, monitoring your cash flow, and carefully reviewing expenses.

4 Common mistakes in small business financial management

By being aware of common financial mistakes, you can avoid the traps so many small business owners fall into. These missteps can be costly in the long run if not addressed promptly. Here are five common mistakes and how to prevent them:

1. Heavily relying on credit cards

Business credit cards have their place as short-term solutions, but relying on them too heavily can lead to major financial stress due to high interest rates. Use credit cards responsibly and always have a plan to repay your balances. 

2. Underestimating tax compliance

Tax obligations and compliance often get put on the back burner for small business owners, but this can be a costly mistake. Work with a tax professional from the beginning to stay on top of your tax bill and meet your deadlines. By regularly setting aside money for taxes and staying up to date on laws and possible deductions, you can minimize your tax burden and avoid penalties. 

3. Reporting and tracking expenses manually

Human error is inevitable, so try to avoid it where you can by using accounting software to automate expense tracking and generate accurate expense reports. Spend management software not only saves time, but it can spot discrepancies that you may never have noticed, allowing you to course correct in real time. 

4. Neglecting an emergency fund

Emergencies happen, and you don’t want to leave your business vulnerable. Build and maintain an emergency fund to cover unexpected expenses or business downturns. This provides a soft landing for tough times and gives you peace of mind that your business is set up for long-term sustainability.

Easy small business financial management with Rippling

Ready to simplify your financial management? Rippling is a comprehensive solution for small businesses that can automate the most tedious financial management work, so you can focus on what matters—building your business. 

In addition to handling payroll and benefits, Rippling has an integrated spend platform that combines Expense Management, Corporate Cards, Bill Pay, and Headcount Planning into a single system. With the unified platform, you can automate tedious tasks like expense approvals and receipt reconciliation, all while setting and automatically enforcing customized spend policies to monitor transactions in real-time. By consolidating your essential spend management software into one user-friendly platform, Rippling provides small businesses the efficiency and control they need to succeed. 

FAQs on small business financial management

What is financial management in business?

Financial management in business is the planning, organizing, and controlling of financial activities to achieve your goals. Financial management involves monitoring cash flow, budgeting, accounting, and making decisions about investments and debts. 

What is the difference between profit and cash flow?

Profit is the difference between your total revenues and expenses over a specific period, while cash flow is the movement of cash in and out of your business. Profit is an indicator of overall financial health and cash flow ensures you have enough funds available for operational needs.

How do you balance small business finances?

Balance your small business finances by creating and sticking to a budget, regularly monitoring your financial statements, and tracking your expenses carefully. Keep your business and personal finances separate, use accounting software to track transactions, and keep a close eye on your cash flow and budget to make adjustments as you go. Remember, you can always come back to these financial tips for small business owners when you need a refresher. 

What are the key financial statements that should be monitored regularly?

The key financial statements to monitor regularly are the balance sheet, income statement, and statement of cash flows. The balance sheet gives you a snapshot of your assets, liabilities, and equity; the income statement shows your revenue and expenses over a period; and the statement of cash flows tracks the inflow and outflow of cash, helping you manage liquidity. Regular review of these statements helps you make informed financial decisions and maintain overall business health.

This blog is based on information available to Rippling as of September 17, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.