The Basics of Financing a Business

Sound financial management is at the heart of every business, no matter how big or small. Without it, even viable and potentially profitable businesses will fail.

Every year in the UK, around 400,000 new start-up businesses begin trading, but just two-thirds of those are still in business within three years and just half remain after five years. For most of those businesses, it’s not a lack of customers or poor-quality products or services that are responsible for their demise – it’s simply a lack of cash.

Important financial decisions have to be made right from the off. There is no bedding-in period. While some small business owners may have prior experience running a business or have strong financial literacy, many are complete novices. That’s when it pays to have resources to turn to that will guide you through the crucial early decisions and the financial tasks you’re going to face.

This guide to managing small business finance has been written for those with limited business finance experience in mind. It’s for those of you who have had an idea and decided to pursue it, but now need a little help to manage your finances effectively. 

A Guide in 5 Sections

We’ve split the guide into five sections, each designed to help you through a crucial aspect of your small business’s financial development.

1. Managing and Tracking Small Business Cashflow
2. Small Business Accounting Basics
3. Financial Planning and Forecasting for Small Businesses
4. Managing Small Business Debt
5. Understanding your Small Business Finance Options 

Part 1: Managing and Tracking Small Business Cashflow

Cashflow is defined as the money that moves into and out of your business over a specific period.

Cash comes in and goes out of your business constantly. It comes into the business as ‘income’ from customers and clients who buy your products and services. It flows out of the business in the form of ‘expenditure’, such as rent, wages, monthly loan payments, payments to suppliers, etc.

Positive Cashflow

‘Positive cashflow’ i.e. when you receive more income than you pay out in expenditure, must be maintained if you are to remain in business. If you have positive cashflow, your business will be able to pay its bills when they’re due and meet any unexpected costs. 

Negative Cashflow

There may be periods where you experience ‘negative cashflow’, for example, if you buy a new piece of machinery or a payment from a customer is overdue. Potentially, you may have to rely on a bank overdraft or short-term loan to cover this cashflow shortfall. However, as long as the negative cashflow has been planned for and your business reverts to a positive cashflow position, it should not cause a serious problem for your small business.  

Cashflow is usually tracked over a standard reporting period such as a month, a quarter or a year.

Why is Cashflow so Important for Small Businesses?

Cashflow is critically important to the success of your small business.

A lack of cash is one of the most common reasons why businesses fail. Even the most successful businesses can quickly find themselves in trouble if their cash is tied up in late or unpaid invoices and they can no longer pay their bills. 

One of the most difficult periods for cashflow is in the early days of your business. While you’re busy setting up the business, you will have many expenses but no clients or customers to create an income stream. That’s why it’s so important you consider your cashflow situation from the outset and make sure you have a temporary source of cash such as savings or an overdraft to keep you going while you wait for the money to start flowing in. 

Keeping a close eye on cashflow is also particularly important for seasonal businesses. If you have a large fluctuation in income at different times of the year, you must track and manage your cashflow carefully. Although managing cashflow in this type of business can be tricky, it can be done, and we’ll show you how. 

How to Manage Your Small Business Cashflow

So, what can you do to make sure your business doesn’t run out of money and fail? 

(1) Create a Cash Flow Statement and Forecast

The best way to keep a close eye on the flow of cash in and out of your business is to create a cashflow statement and forecast. These very simple financial documents will give you a snapshot of your actual monthly cashflow and your forecast monthly cashflow. 

These days, your accounting software should have a cashflow statement as one of its standard reports. However, if not, these documents are very easy to create yourself and do not require any prior accounting experience at all. This simple cashflow template and accompanying article from the Association of Chartered Certified Accountants includes everything you need to know. 

(2) Think about Your Payment Terms

Another big step in managing your small business’s cashflow situation is choosing appropriate payment terms. Many businesses that sell directly to the end customer take payment immediately. For example, a restaurant is paid once the customers finish their meal, while a plumber or electrician will expect to be paid as soon as their work is done. 

However, businesses that sell to other businesses often offer credit in the form of payment terms of 7, 14, 30, 60 or even 90 days. Extending credit to customers and clients can be an effective way to attract new business and build trust, but it will also have a direct impact on your cashflow. Offering payment terms of 60 days might be attractive to a customer who will be able to ‘buy now and pay later’, but how will you operate while you wait for the payment to be made? 

There’s also the perpetual problem of late payments to think about. Late payments are a leading cause of cashflow problems, so it’s worth thinking about how you’ll encourage your customers to pay on time. There are several strategies you could consider, such as charging interest on late payments, offering early payment discounts to incentivise customers to make quick payments or imposing ‘due on receipt’ payment terms. 

(3) Choose who you do business with very carefully

As a small business, you must be selective about who you work for and credit-check new prospects before you agree to work with them. Turning down potential new contracts based on a credit check is certainly not easy, it takes a steely resolve, but it could be the best thing you do for your business.

Just imagine what would happen to your cashflow situation if you spent a month fulfilling an order for a single customer, only for them to accept the goods and refuse to pay. You could take legal action to recover the money you are owed, but that will be expensive and take time. During that time, how will you function without being able to buy new stock, pay your bills or pay employee wages? 

Credit agencies such as Creditsafe and Experian allow you to instantly credit check a company online. If you see that the business has a less than perfect credit history, you might decide not to grant them credit or even choose not to work with them at all. Monitoring the credit activity of key individuals who are involved in the company could also be beneficial. If they’ve been associated with other organisations that have failed or are the directors of multiple companies at the same time, it might be better to stay away.

(4) Set expectations and make it watertight

Assuming a new customer has an excellent credit record and you’re happy to supply your goods or services, you now have to make sure they understand the terms under which you agree to do business. Although a verbal exchange might be used to initially agree your payment terms, you should make sure that is followed up with watertight payment terms and conditions in writing. 

That should cover everything from delivery terms to what will happen if you’re not paid. Writing up your payment terms might sound time-consuming, but depending on the nature of your business, you may find that a standard set of terms and conditions available online that covers all the necessary details. 

(5) Get to know the people behind the payments

To reduce the likelihood of payment delays, it’s always beneficial to build relationships with the individuals who will be making the payment. Checking that the invoice has been sent to the right place and all the necessary details are correct will help to reduce delays. When submitting the invoice, it’s also worth asking if there’s any reason why the payment won’t be made on time, as most people will do everything they can to not go back on their word. 

Part 2: Small Business Accounting Basics

Unfortunately, running your own business comes with a number of time-consuming but unavoidable bookkeeping, tax and accounting tasks. Although they might be frustrating, these tasks are crucial to not only keeping your business safe and compliant in the eyes of the taxman but also to generating valuable information that you can use to run your business more effectively. 

The reality these days is that the vast majority of small businesses use cloud accounting software to make day-to-day accounting tasks much easier, while some also work with an accountant who takes care of their filing obligations on their behalf. However, to run the finances of a small business effectively, there are still several important steps you must take yourself:

What are the Small Business Accounting Basics you Need to Take Care of?

(1) Open a separate business current account

All limited companies are legally required to have a separate business bank account. Although sole traders are not legally required to open a separate business account, doing so will save you some serious headaches along the way and make it easier to keep your finances in order. Consider factors such as transaction fees, withdrawal fees, introductory offers, admin features and the level of customer support that’s available when choosing your business account. 

(2) Choose cloud accounting software

Almost all but the smallest businesses invest in some form of cloud accounting software. Cloud accounting software can be a perfect solution for business owners who would prefer not to hire a professional due to the costs involved. For growing limited companies, cloud accounting software is often used in conjunction with a professional small business accountant to make sure all their accounting and tax obligations are met. 

Xero, QuickBooks and FreeAgent are all popular examples of accounting software that can be used. They all offer a free 30-day trial so you can find the best fit for your business before you commit. 

(3) Consider hiring an accountant

Keeping on top of your accounting obligations is an ongoing job. In the early days, you might be able to submit your tax returns on time and file the company accounts yourself with the help of your cloud accounting software. However, as your business grows, you’ll find you have less time and your company accounts become increasingly difficult and time-consuming to produce. 

The Small Business Accounting Terms you Must know

Whether you choose to hire a small business accountant or are happy to fulfil your accounting obligations yourself, there are some small business accounting terms you must have an understanding of.

Bookkeeping

Bookkeeping is the day-to-day administration you must do to keep your small business’s finances in the best possible shape. It includes tasks such as generating and sending out invoices, recording your expenses, monitoring your outgoings and paying employees. 

Annual accounts

If you run a limited company, you must produce and file annual accounts with Companies House every year before the end of your accounting deadline. This is a formal record of your yearly financial performance that must be presented in a prescribed way. Most limited companies use a professional to do this for them. The relevant accounts must be filed by your accounting deadline or you risk a fine.

Although sole traders do not have to file accounts, they should prepare a balance sheet and a profit and loss account each year.  

Corporation tax

Corporation tax is something all UK limited companies have to pay on any profit they generate that’s not ring-fenced. The current rate of corporation tax is 19 percent. To meet their obligations, companies must complete a corporation tax return every year and pay the amount due within nine months and one day of the end of the accounting period.   

Sole traders and partnerships do not pay tax on their business profits. Instead, they pay tax via the self-assessment income tax system. 

Self-assessment income tax

As a general rule, anyone who receives income which is not taxed at source must complete a self-assessment tax return. Sole traders must complete a self-assessment tax return to pay income tax and National Insurance contributions. 

If you’re a limited company director, you’ll also need to register for self-assessment and complete a tax return every year, unless your income is taxed under PAYE and you have no other taxable income. 

The gov.uk website has an online tool that will tell you whether you need to file a Self-Assessment tax return. 

Income tax rates

Everyone has a tax-free personal allowance of £12,500 (2019/20). Basic rate income tax is paid at 20 percent on income between £12,500 and £50,000. Any income above £50,000 falls into the ‘higher rate’ band and is taxed at 40 percent. That then rises to the ‘additional rate’ of 45 percent for income above £150,000. National Insurance contributions must also be paid on income at various rates and thresholds 

In the case of limited companies, dividend income is tax at lower rates and there are no National Insurance contributions to pay, making it a tax-efficient way to take money out of a limited company. 

VAT

Regardless of your business’s legal structure, all businesses must register to pay VAT if your annual turnover is £85,000 or more. VAT registration is optional if your business’s turnover is below that. VAT is charged at the standard rate of 20 percent. 

You must file VAT returns and pay/reclaim the difference between the VAT you have paid on business-related expenses and the VAT payments you have received. VAT returns and payments must be filed and paid quarterly. 

PAYE 

As an employer, it is your responsibility to calculate and deduct income tax and National Insurance contributions from the salaries of your employees and pay them over to HMRC. PAYE must be paid monthly. You must also pay employer’s National Insurance at a rate of 13.80 percent. 

Part 3: Financial Planning and Forecasting for Small Businesses

Financial documents have a crucial part to play in any small business. They have a wide range of uses, from the internal tracking of revenue and expenses to proving the viability of your business to investors and finance providers. Keeping on top of your financial planning and forecasting will also help you identify potential issues before they arise and allow you to make more informed decisions about the direction the business will take. 

What financial planning and forecasting documents should a small business have? 

There are four main financial planning and forecasting documents that every small business owner should produce and regularly maintain. That includes:

(1) Balance sheet

A balance sheet gives you a snapshot of your business’s financial standing at any point in time. A balance sheet is made up of three parts: 

• Assets – The things the business owns (machinery, vehicles, buildings, etc.)
• Liabilities – The money the business owes (bank loans, debts to suppliers, etc.)
• Equity – The amount the owners have invested in the business

These three pieces of financial information can be used to calculate the net worth of your business at any time. A balance sheet that shows a positive balance, i.e. the total assets of the business are worth more than the liabilities plus equity, shows that your small business is built on solid financial foundations. 

The balance sheet also gives third parties such as the bank and prospective investors a clear picture of how the business is being financed. If you do not have the money to invest in the business yourself (equity) then you will have a higher value of liabilities. 

Here’s a sample balance sheet along with templates you can use to create your own.

(2) Profit and loss statement

A profit and loss statement summarises the business revenues and expenses over the course of the year. Using those figures, you can calculate your net profit or loss for the period. Maintaining an accurate profit and loss statement will allow you to measure your profitability over time, and critically, it will determine your breakeven point (the revenue you must earn to cover the company’s total expenses). 

Creating profit and loss projections for future years can also be invaluable for your business. Creating three different profit and loss forecasts based on the best-case, worst-case and most likely scenario will give you an idea of how your business is likely to perform in the coming months and years. If you forecast the business will make a healthy profit, you may decide to invest in new plant, staff or R&D projects. If your forecast indicates low profit levels, it might be time to consider cost-cutting measures.  

Here’s a sample profit and loss statement and a simple template you can download. 

(3) Cashflow statement

We’ve already discussed how the level of cash in your business can make or break its financial health. For that reason, a cashflow statement is a document you’d be wise to create and maintain.

A cashflow statement reflects the inflow of revenue and the outflow of expenses from your business activities over a specified period, typically a month or a quarter. It allows you to make sure there is enough cash in the business to operate effectively on a day-to-day basis and take action before problems occur.  

Here’s a simple cashflow statement template from the ACCA.

(4) Breakeven analysis

A breakeven analysis is used to determine the number of units you must sell or pounds of revenue you must receive to cover your total costs. In the early days of a new business, it is not unusual for a small business to make a loss. However, over the longer term, if the business struggles to breakeven, it’s a sign that it may not be financially viable. Calculating the breakeven point can help you determine if your prices are too low or your costs are too high and evaluate a potential business expansion or new project. 

Here’s a simple guide you can use to conduct your own breakeven analysis.

Part 4: Managing Small Business Debt

Debt is undoubtedly a useful tool when starting and growing your small business, and in reality, the vast majority of small businesses will rely on debt financing of some type. However, there’s a fine line between having debts that you can manage and debts that are spiraling out of control. Sometimes, all it takes is a single event such as a market downturn, a late payment from a customer or a dip in sales to tip the balance.

Good financial management is about the little things. It’s about taking public transport to meetings rather than taxis and reducing costs where you can. The same can be said of managing small business debt. You need to keep a constant eye on the situation and take steps to prevent debt from snowballing out of control. 

What Steps can you Take to Manage Small Business Debt More Effectively?

(1) Create a rainy day fund

It’s impossible to plan for every eventuality in business, so just as in your personal life, it pays to have some savings you can dip into when you’re faced with unforeseen costs. If you have some money left at the end of the month, top-up your savings fund and make sure there’s always a minimum amount in the account. That will reduce your reliance on a business overdraft and credit card to cover costs such as long-term staff illness and the breakdown of vehicles and allow you to take advantage of unexpected growth opportunities.

(2) Cut unnecessary spending

If debt is becoming a problem for your business, there are likely to be cost-cutting measures you can take that will not impact your ability to run the business effectively. That could include cancelling a weekly cleaning service, reducing the amount you spend on office supplies, making non-essential members of staff redundant and meeting clients in coffee shops rather than hiring meeting rooms. You’ll be able to revert to your regular spending habits once your debt is under control.  

(3) Increase your revenue

There could be a number of relatively simple ways to increase your revenue that you’ve overlooked. For example, something as simple as offering an early payment discount to your customers could lead to a short-term cashflow injection. Alternatively, if you’re not using all of the available space in your business premises, you could consider subleasing the unused square footage to raise additional income or downsizing to lower your rent. On the other hand, if you have a method of marketing your business that’s proven to generate results, increasing your marketing spend temporarily will lead to an upturn in sales.  

(4) Consider refinancing

If you have a business loan that you’re repaying at higher than the current market rate of interest, consider refinancing in favour of a loan with more manageable monthly repayments. If business loans aren’t available at lower interest rates, make paying off loans with the highest interest rates a priority. You should pay off any debts that you have provided a personal guarantee for first. That will ensure your personal assets are not at risk if the business defaults. 

(5) Negotiate with suppliers

Do not hesitate to negotiate with suppliers and ask for discounts when you place bulk orders. You could use lower quotes from other suppliers as leverage or draw on your history of making prompt payments to negotiate more flexible or extended payment terms. You could also consider teaming up with another small business to make bulk purchases at lower prices.  

(6) Manage and boost your credit score

Your ability to qualify for business credit of any kind, whether it’s a business credit card, a small business loan or a property or equipment lease, will depend on your business’s credit rating and history. The better your credit history is, the easier it’ll be to secure finance and the lower the interest rates you’ll have to pay.

Taking steps to increase your credit score may not reduce your debt repayments now, but it will help you access more affordable credit in the future.

Tips to increase your credit rating include:

• Check your credit report: Obtain your business’s credit report from major credit reporting agencies such as Equifax and Experian. That will provide information to help you raise your score and show you which accounts are negatively impacting your report.
• Reduce your credit utilization rate: Keep your credit utilisation rate, that is, the amount of credit you use in relation to the amount of credit available, at less than 15 percent.
• Create more positive credit events: Establish credit accounts with suppliers to increase the number of positive payments on your file.
• Add successful payment experiences manually, if necessary: Not all vendors and suppliers share payment data with business credit-reporting agencies. However, you can add positive payment experiences to your credit file manually by contacting the agency.
• Make sure your details are accurate and up to date: It’s important to make sure the details on your credit file are accurate and up to date. If you see something that’s on your report and shouldn’t be there, give the credit agency a call to dispute it.

(7) Raise funds to repay your debts

It’s not always easy for an indebted business to raise funds as investors will typically view a business that’s free from debt as a better investment proposition. However, there are still several options open to you:

• Borrow from family and friends: Borrowing money from family and friends can give you access to funds at favourable rates that you would not receive from the bank. However, it can also put a strain on your personal relationships, so it’s something you should think about very carefully.
• Realise company assets: Selling non-essential company assets could be an effective way to raise funds to repay your business’s creditors.
• Seek investment: Opening up the business to new investment could be an option for your business; however, the presence of debt means investors are likely to want more of your business for their money.   

Part 5: Understanding Your Small Business Finance Options

At some point in the development of your small business, you’ll probably need to seek business finance in some form, whether that’s to deal with short-term cashflow issues or to fund the growth of your business over the longer term. There are numerous business funding options available to you depending on the nature of your business and the particular challenges you face or the opportunities you want to capitalise on.

Although there are plenty of different ways to raise money for your business, the reality of securing the funds you need can be tricky. However, how you go about securing the funds can make a big difference to the success or failure of your business, so you must consider all your options very carefully. 

What’s the difference between debt financing and equity financing?

There are two main types of business financing: equity financing and debt financing. 

• Equity financing is the most common method of financing a small business. It involves an investor making money available in exchange for a share in the ownership of the business. This could be as a silent partner or as a shareholder who will have a say in how the business is run. In return for their investment, the investor will receive dividends and will eventually hope to sell their share in the business for a profit.
  
  
• Debt financing is more familiar to most people because it is the basis for many personal credit products. In a debt financing agreement, the lender charges interest on money that is borrowed by the business. The lender does not receive a share in the business. Instead, the borrower agrees to repay the loan along with interest at the end of the agreed period. Payments are typically made monthly.  

What are the pros and cons of equity financing?

Pros: 

• Reduced risk: There’s less risk with equity financing as there aren’t any fixed monthly repayments to make.
• Improved cashflow: Equity finance doesn’t take cash out of the business, boosting cashflow and reducing the money needed to finance growth.
• Long-term planning: Equity investors don’t expect to receive an immediate return on their investment, which allows the business to take a long-term view. 
• Bypassing credit problems: Businesses with credit problems that secure investment can access funds without having to pay inflated interest rates. 

Cons: 

• Cost: Equity investment involves a high level of risk so investors will expect a sizeable share of the business. The proportion of company profits they receive could be higher than the cost of debt financing.
• Loss of control: The business owner will lose some control of the company and will have to consider the views of equity partners when making business decisions. 
• Potential for conflict: The investor may not always agree on the best way forward for the business, potentially leading to conflict. 

What are the pros and cons of debt financing?

Pros: 

• No dilution of control: Taking out a loan is temporary. The lender has no say in how the business is run and the relationship ends once the debt is repaid. 
• It’s tax deductible: Interest paid on a business loan is a deductible expense when your tax bill is calculated. Dividends paid to shareholders are not.
• It’s predictable: You know exactly how much you’ll have to pay to service the debt every month so it can be planned for in advance. 

Cons: 

• Payments are fixed: While the predictability of the debt repayments can be an advantage, there’s very little flexibility if you experience a temporary cashflow shortfall.
• Security: Lenders will typically demand that business assets are provided as security on the loan. Those assets could be at risk if debt repayments are not made. The owner may even be required to guarantee the loan personally. 
• Qualification: Not every business will be accepted for a debt finance deal.  
• Cashflow: Debt repayments will eat into the available cashflow every month, potentially hindering the business’s growth.

What different types of small business finance are available? 

(1) Bank loans

Traditional bank loans are still one of the most popular sources of debt financing for small businesses and startups. This option is suitable for a business that has a good relationship with its bank, a sound credit history and a compelling business case. You should research loan types, terms and interest rates thoroughly to find the most appropriate deal for you. 

(2) Crowdfunding

One relatively new form of business financing is crowdfunding. With this funding method, you raise money from the general public via crowdfunding platforms such as Kickstarter, GoFundMe and Indiegogo. Investors can either lend you the money via a peer-to-peer lending agreement or receive shares/equity in your business. This is suitable for businesses with an attractive proposition that can attract plenty of investors. However, it can take a long time to reach your funding goal.

(3) Invoice finance

Invoice financing is the process of essentially selling your unpaid invoices at a discounted rate in return for receiving the cash upfront. That means, rather than having to wait for 30, 60 or even 90 days for a customer to make a payment, you can release the cash tied up in the invoice almost as soon as it has been issued. This can be an effective way to raise finance for businesses with a poor credit history that need a quick injection of cash.

(4) Business credit card

Using a business credit card to fund your small business can be risky. If you fall behind on your repayments your credit score will take a serious hit. Equally, if you just make the minimum payments every month, you can create a debt that’s difficult to clear. However, use it sparingly and responsibly and a credit card can be a useful tool to boost your cashflow and make occasional business payments.

(5) Small business grants

The wonderful thing about small business grants is that you don’t have to pay the money back. Small business grants are designed to reward innovative companies and businesses that operate in an area of need by offering direct cash or discounts on important resources. The grant will usually have to be used in a specific way and the criteria businesses must meet can be tough. The government’s business finance support finder is a good place to search for grants. 

(6) Venture capital

Venture capitalists are professional investors who invest a significant amount of money into a business in return for an equity stake. They typically invest in startup businesses with high growth potential to help the business grow quickly so they can realise a good return on their investment in a relatively short time frame. Venture capitalists typically offer expertise as well as money, but you will have to be prepared to give up a significant chunk of your business. 

(7) Enterprise Finance Guarantee

Many viable small businesses don’t qualify for bank lending simply because they cannot provide sufficient security to meet the lender’s requirements. In that instance, the government’s Enterprise Finance Guarantee can provide a guarantee of up to 75 percent of the value of the loan. That can give you access to finance streams that might not otherwise be available as long as your business meets the strict qualifying conditions. 

(8) Short-term business loans

For businesses with relatively small and immediate financing requirements, short-term loans could be just what you need.This type of loanis extremely quick to arrange and the cash can be in your account in a single day to help you cover immediate overheads such as rent and payroll. This can be an effective funding option if you’re just bridging a gap and are confident you’ll have the cash to make the repayments on time. However, the rates of interest are high and the costs can quickly mount up. 

Put Financial Management at the Heart of Your Business 

Managing the finances of your small business shouldn’t be an afterthought. If your business is to survive past the five-year mark, when 50 percent of UK small businesses have already failed, it must become a fundamental part of your strategy. Understanding the numbers that drive your business will improve your decision making and help you identify when it’s the right time to invest in growth and when cost cutting measures must be put in place.  

At AABRS, we advise company directors and sole traders whose small business finances have become unmanageable. That could be due to a cashflow shortfall or bank loans, tax bills and wages that cannot be paid. We can provide you with a full range of options to help your business emerge unscathed from a problematic financial position and go on to be a profitable business once again. We can also advise you on the formal and informal insolvency processes that will help you reach the best resolution for you and your business. 

After two years, COVID-19 is still affecting businesses financially. Around 71% of small business owners in the U.S. have said that the most recent spike in cases had a negative impact on revenue. Although small business optimism is quite high at an assigned score of 63 — up from a record low of 39.5 in the second quarter of 2020 — business owners still face a major challenge of generating adequate revenue under difficult conditions.

Overall, many businesses currently have a long-term, positive outlook on growth. Nevertheless, the looming threats of COVID variants, inflation fallout, supply chain disruptions, and even potential economic shockwaves from the conflict in Europe plague the long road to recovery. It is therefore necessary for businesses to prioritize finding better ways to manage their finances and make the most of what they have. Below are a few tips for how to manage this.

Monitor your cash flow

Your cash flow represents the amount of cash spent over a specified period of time, and for what purpose. Many businesses fail because they don’t clearly understand where their money goes; this makes them more prone to overspending, unnecessary bank account overdrafts, or hemorrhaging liquid assets. By contrast, monitoring your cash flow –– coupled with a solid budget –– is the key to mitigating problematic financial patterns.

To determine your financial health according to cash flow, look at business expenses, overhead costs, and sales and operating margins. Review your business reports as well. It may well be that you’ll realize that some clients are consistently late on payments, keeping your cash tied up in unpaid invoices. If this is the case, one customer collection tip is to send your invoices immediately, so that clients have ample time to prepare the payments. Then, send reminders and follow-ups regularly, because many people (and businesses) genuinely forget deadlines.

Review your books regularly

You may be strapped for time, money, or technological capabilities, but all businesses should exercise some form of internal control over finances and monitoring. Establishing internal financial protocols, such as dedicating time to review and update financial information, will allow you to spot potential wasteful spending, unaccounted losses, or even fraud or embezzlement that could lead to expensive legal problems.

Moreover, reviewing your books will help you to better apply agile accounting techniques. Given the curveballs thrown by shifting market demands, the agile methodology helps you to be more adaptable in your financial processes. This framework encourages careful time management and goal-setting, where you plan an accounting sprint that lasts between one and three weeks. Afterwards, agile accounting recommends reflecting on sprint success to encourage continuous bookkeeping improvement.

Invest in financial analytics

Investing in financial analytics essentially means using a company’s financial data to predict and plan for the future. With this detail-oriented approach to your finances, you can shape the strategy for your business through reliable and factual insight, rather than intuition. Generally speaking, modern accounting training focuses increasingly on the application of analytics in evaluating costs and benefits, forecasting future needs, monitoring financial margins, and even checking the creditworthiness of customers. Managing your finances with these efforts in mind will help you to generate the most insightful possible pictures of your standing.

With the development of financial analytics tools, businesses can increasingly tap into technologies that automate these processes as well. One of the most important functions of data-driven financial analytics is forecasting, for instance, and forecasts can typically be generated by tools into which you feed relevant data. Revenue forecasting allows you to model the best- or worst-case scenario for your finances. With this insight, you can make informed decisions.

Explore additional sources of funding

Obtaining additional financing is another way to help improve the outlook for your business. If you’re a new entrepreneur, you can tap into start-up funding by presenting a detailed, precise, and well-researched business plan to investors.

For more established businesses, the path is somewhat less clear. One good option though is to get a business line of credit or a business credit card for short-term financing; build good business credit by paying off debts as soon as possible. For larger projects like renovations, new equipment, or a big marketing campaign, a business loan would be better. While it can feel daunting to take out a loan, the influx of capital will boost your cash flow and lead to business growth. As long as the money is used judiciously, you may stand to experience fewer issues over time.

Ultimately, managing business finances is a difficult challenge –– even in the best of times. With a measured, strategic approach however, you can adopt strategies like the ones discussed above and put your business in a position to weather difficulties and thrive moving forward.

Post solely for the use of doing-business-international.com By Gene Hanson

Create a process

Start by creating a plan for how you want to run your financial process and stick to it. Without a set of rules to follow, our tendency is to improvise but this is the last thing you want to do when dealing with money! If you don’t know anything about managing business finances it may be worth considering seeking advice - an expert will be able to guide you through this vital initial stage. Your process doesn’t have to be complicated, but it does need to be consistent and the time you take now will set the groundwork for the future success of your business.

Think about your payment terms

The payment terms you use will depend on the type of business you have. If you sell your products directly to customers, such as in a shop or restaurant, you’ll usually take payment immediately. Similarly, if you freelance in a trade like plumbing or design, you may expect to be paid as soon as the work is done.

If your business sells products or services to other businesses you may want to negotiate payment terms of seven, 14, 30, 60 or even 90 days. Showing flexibility by offering long payment terms can help attract new business and build trust, but it will impact your cash flow so carefully consider how this will affect your operations before extending credit.

Whatever payment terms you decide on, make sure you have a document which clearly sets out the payment terms and method that both you and the client have signed and agreed on. This will help protect your cash flow and avoid misunderstandings down the line.

Choose a day for finance admin

A top tip to keep on top of your accounts is to pick a day in which to do your financial tasks. Then, if you know you’ve got a set time to review your finances and your invoices are going out on the same day each month, you can easily keep track of late or missed payments.

Choose whichever day suits you best to do your finances but, generally, invoicing is done at the beginning or the end of the month so it may help your clients to fit in with this typical schedule. No matter what day you choose, never leave your invoicing to the last minute and always double-check the details - sending the wrong information to a client can not only be embarrassing, but also lead to late payments and even lost business.

Find the right tools to help

Keeping accurate business records is a complex process but, if your accounts aren’t up-to-date, you risk losing money, missing payments and damaging your business reputation. The good news is, record keeping doesn't need to be stressful. When you’re just starting out, you may find a simple spreadsheet with your income, expenses and cash flow is enough, but when your business starts to grow it's highly likely you’ll need a more sophisticated system.

This is where apps like My T can help streamline your process, allowing you to produce invoices, store receipts and view your reports.

What’s more, by going digital you’ll be ahead of the curve for when HMRC introduces the Making Tax Digital rules for micro and small businesses in 2023. With the right technology in place, the process of keeping on top of your accounts will become easier and much less demanding, leaving you free to focus on what really matters, getting out there and selling your products!

Managing your business finances should never be an afterthought. Rather, it should sit at the heart of your business strategy. After all, if you don’t keep on top of your finances, they’ll soon get out of hand.

While the world of finance can be an intimidating one, it's important to remember that you don’t have to become an expert overnight. By following the steps above, you’ll learn and gain confidence as you go, laying the groundwork for a lasting and successful business.

Managing small business finances is no cakewalk. As per the State of Small Business Cash Flow report Almost 61% of small business owners have reported that handling consistent and steady cash flow can be challenging.

No matter how good your product or service is, if you are lost when it comes to small business finance management, building a profitable business may remain a far-fetched dream. 

Here are nine tips to help you keep your small business finances running smoothly while also planning for your future.

1. Prioritise business financial planning

A comprehensive small business finance plan includes budgeting, accounting, future prediction, tax planning and risk management. 

You must analyse your businesses’ accounting reports and financial statements from time to time to gain insight into your business performance. This will allow you to set the right financial goals, whether to invest more money in your business (for expansion, buying new inventory or hiring staff) or save for retirement.

Also, the best way to avoid tax stress is to prepare ahead of time. Avoid common tax mistakes with organised records and bookkeeping. In addition to understanding tax deductions, learn how to lower your tax burden as a small business owner through tax audit.

2. Create a budget and stick to it

Putting together a budget can completely change how you manage your small business finances and help you achieve revenue goals sooner than you’d expect. A budget can help you accurately forecast the revenues your business will generate and even identify unnecessary expenses. 

Ideally, you should first create an operating budget that shows you the projected revenues for the financial year. Even though this is only a high-level summary, it includes all the essential details about your business’s fixed cost, variable costs and operating expenses. 

Think of the operating budget as a tool that tells you whether your expenses are as per plan. Next, focus on a cash flow budget to keep track of money going out and coming in. Doing so will ensure that you know your businesses’ liquidity position.

3. Get a corporate card for your business

Corporate credit cards aim to solve the hassles of digital spending for businesses. They increase the company’s purchase power while improving the cash conversion cycle with short-term credit at no cost (zero interest). 

With corporate credit cards, you also get a higher credit limit than personal cards to be able to make all business expenses without affecting personal liability. 

Apart from helping manage small business finances, corporate credit cards make compliance and reporting much easier for a growing business that needs to focus on core business goals. 

Get a corporate credit card

Suggested read: Corporate Credit Card: Why Every Business Should Get One

4. Obtain a line of credit 

Obtaining small-term financing or a line of credit is another tool to help you manage your small business finance and ultimately grow your business. 

When you own a business, a line of credit can help you tackle several short-term funding requirements, such as maintaining inventory, salary payments or addressing new orders. 

Also, having access to a line of credit can help you control your cash flow throughout the year.

Avail a line of credit

Suggested read: 6 Reasons Why a Line of Credit Is Necessary for Every Business

5. Optimise your payroll process 

While ensuring steady cash flow is important, you also need to think about the best ways to streamline your payroll process. 

Choosing the right payroll software is an easy way to ensure that salaries are directly deposited into your employees’ bank accounts. 

A direct deposit helps to manage cash flows better; you eliminate the chances of different employees depositing their cheques at different times that can disrupt cash flows and prevent you from accessing funds in your account as they are allocated for the outstanding checks. 

Disburse salaries in a click

6. Don’t be afraid of loans

Many business owners fear that they will enter a debt trap once they start borrowing money. But this couldn’t be further from the truth. 

Business loans help you tackle unforeseen expenses. No matter how skillfully you manage your small business finances, any disruptions and volatility in the market can make it incredibly difficult for your business to meet any working capital requirements. 

Some of the best features of small business loans include minimal documentation and easy eligibility. This makes the application process quick and hassle-free.

Small business loans are collateral-free and offered at competitive interest rates. You can use the loan for different needs of your business, such as buying inventory, paying salaries or even utility bills. 

Get a small business loan

7. Keep your business and personal finances separate 

Mixing business expenses with personal finances is the perfect recipe for creating disorganised records. 

Not only does it make it incredibly challenging to keep track of money received and money spent, but it can also result in overspending as you may end up using your personal funds for business expenses and vice versa. Moreover, a clear separation between personal and business finances is also necessary so that you can claim tax deductions for various business-related expenses. 

8. Improve inventory analysis 

Inventory management is the fundamental building block to your company’s longevity. When your inventory is organised, your entire supply chain will be on the right track. Not having your inventory in place can lead to issues like mis-shipments, out of stocks, overstocks, financial inefficiencies and more. 

For example, if a customer doesn’t know that an item they wanted in store can also be purchased online, a sale is lost, one that could’ve helped a business move inventory that might soon be out of season. 

9. Opt for a financial service/tool

You can leverage various financial services and tools to better manage your small business finances and cash flow. These tools help business owners and finance teams automate manual, repetitive financial tasks and provide insights into money flow.

Manage your business finances

Final words

These are some of the easy ways to manage small business finances and keep your business operations running smoothly. 

Remember that as a small business owner, you already have enough on your plate. Delayed access to funds or long-drawn approval processes can completely stall growth opportunities coming your way. 

Luckily, end-to-end solutions offered by Razorpay Capital are designed to help small businesses get financed and grow. 

So what are you waiting for? Fast forward your business with Razorpay Capital right away!

Explore Razorpay Capital

• Properly managing your finances stabilizes your company and makes your business less likely to fail.
• To manage your company’s finances, make sure to pay yourself, keep good credit, monitor your books and plan ahead.
• Debt funding for small businesses means interest fees alongside repayments, while equity funding excludes interest but may come with less control over your company affairs.
• This article is for business owners looking for advice on how to manage their company’s finances.

Managing finances can be a challenge for any small business owner. Often, the reason your small business is successful is because of the skills you bring to making your product or providing your service. If you don’t have a lot of experience with managing business finances, it can feel like a chore and you could be slipping into bad financial habits that could one day harm your business.

The importance of managing your business finances

The most important step for any business owner is to educate themselves. By understanding the basic skills needed to run a small business – like doing simple accounting tasks, applying for a loan or drafting financial statements – business owners can create a stable financial future and avoid failure. In addition to education, staying organized is a major component of sound money management.

“There is nothing more terrifying, costly or risky than showing up at your accountant’s office at the end of the year with a shoebox of receipts and nine of your last 12 bank statements,” said Ryan Watson, co-founder and principal of Upsourced Accounting. “It is impossible to overstate the importance and benefit of properly tracking your financial information throughout the year.”

Key takeaway: Managing your business finances is important for creating a stable financial future in which your company is less likely to fail.

Tips for managing small business finances

Here are a few things you should do as a small business owner to stay on top of your finances.

1. Pay yourself.

If you’re running a small business, it can be easy to try and put everything into day-to-day operations. After all, that extra capital can often go a long way in helping your business grow. Alexander Lowry, a professor and director of the master of science in financial analysis program at Gordon College, said small business owners shouldn’t overlook their own role in the company and should compensate themselves accordingly. You want to ensure that your business and personal finances are in good shape.

“Many SMB owners, especially at the outset, neglect to pay themselves,” he said. “They [believe] it’s more important to get the business up and running and pay everyone else. But, if the business doesn’t work out, you won’t have ever paid yourself. Remember, you’re part of the business and you need to compensate yourself as much as you pay others. 

2. Invest in growth.

In addition to paying yourself, it’s important to set aside money and look into growth opportunities. This can allow your business to thrive and move in a healthy financial direction. Edgar Collado, chief financial officer of Tobias Financial Advisors, said business owners should always keep an eye on the future.

“A small business that wants to continue to grow, innovate and attract the best employees [should] demonstrate that they are willing to invest in the future,” he said. “Customers will appreciate the increased level of service. Employees will appreciate that you are investing in the company and in their careers. And ultimately you will create more value for your business than if you were just spending all your profits on personal matters.” 

3. Don’t be afraid of loans.

Loans can be scary. They can lead to worrying about the financial repercussions that accompany failure. However, without the influx of capital you obtain from loans, you may face substantial challenges when trying to purchase equipment or grow your team. You can also use loan proceeds to boost your cash flow and thus face fewer issues paying employees and suppliers on time.

4. Keep good business credit.

As your company grows, you may want to purchase more commercial real estate, acquire additional insurance policies and take out more loans to facilitate all these pursuits. With poor business credit, getting approval for all these transactions and acquisitions can be more difficult. To keep good credit, pay off all your debt funding as soon as possible. For example, don’t let your business credit cards run a balance for more than a few weeks. Likewise, don’t take out loans with interest rates that you can’t afford. Only seek funding that you can quickly and easily repay.

5. Have a good billing strategy.

Every business owner has a client that is consistently late on its invoices and payments. Managing small business finances also means managing cash flow to ensure your business is operating at a healthy level on a day-to-day basis. If you’re struggling to collect from certain customers or clients, it may be time to get creative with how you bill them.

“Too much cash tied up in unpaid invoices can lead to cash flow problems, a leading cause of business failure,” said James Stefurak, managing editor of Invoice Factoring Guide. “If you have a chronic late-paying customer, which we all do, instead of badgering them with repeated invoicing and phone calls, try a different approach. Change the payment terms to ‘2/10 Net 30.’ This means if the customer pays the invoice within 10 days, they receive a 2% discount off the total bill. If not, the terms are full payment due in 30 days.” [Read related article: What to Do When Customers Won’t Pay Their Bill]

6. Spread out tax payments. 

If you have trouble saving for your quarterly estimated tax payments, make it a monthly payment instead, said Michele Etzel, owner of Bayside Accounting Services. That way, you can treat tax payments like any other monthly operating expense.

Editor’s note: Need a small business loan for your business? Fill out the below questionnaire to have our vendor partners contact you with free information.

7. Monitor your books.

This is an obvious practice, but a very important one. Do your best to set aside time each day or month to review and monitor your books, even if you’re working with a bookkeeper. It will allow you to become more familiar with the finances of your business, but also provide you with a window into potential financial crime.

“Do not neglect bank reconciliations and spending some time each month on reviewing outstanding invoices,” said Terence Channon, principal for NewLead LLC. “Failing to do this, especially if a bookkeeper is involved, opens up the business to wasteful spending or even embezzlement.”

8. Focus on expenditures but also ROI.

Measuring expenditures and return on investment can give you a clear picture of what investments make sense and which may not be worth continuing. Deborah Sweeney, CEO of MyCorporation, said small business owners should be wary of where they spend their money.

“Focus on the ROI that comes with each of your expenditures,” she said. “Not doing this means that you can lose money on irrelevant or bad spending bets. Know where you are spending your hard-earned dollars and how that investment is paying off. If it isn’t paying off, cut back and spend a bit more on the initiatives that do work for you and your business.”

9. Set up good financial habits.

Establishing internal financial protocols, even if it’s as simple as dedicating set time to review and update financial information, can go a long way in protecting the financial health of your business. Keeping up with your finances can help you mitigate fraud or risk.

“As a small business, we are often strapped for time, money and have vastly inferior technological capabilities, but it shouldn’t prevent any small business owner from implementing some sort of internal control,” Collado said. “This is especially important if you have employees. Weak internal controls can lead to employee fraud or theft, and can potentially get you into legal problems if you or an employee are not abiding by certain laws.”

10. Plan ahead. 

There will always be business issues that need to be addressed today, but when it comes to your finances, you need to plan for the future. “If you’re not looking five to 10 years ahead, you are behind the competition,” said Tina Gosnold, founder of QuickBooks specialist firm Set Free Bookkeeping.

Key takeaway: To best manage small business finances, pay yourself a salary from your company’s earnings, plan ahead, pay off debt in a timely manner and focus on your return on investment.  

Types of business finances

It is important to remember that business finances aren’t just about your earnings – they’re about how you spend your money and where you get it. When it comes to where you get your funding, you should understand the two main funding categories:

Debt funding

Debt funding is a loan that your company repays with added interest. Through debt financing, you can quickly access capital that you might not otherwise be able to get for weeks or even months. Bank loans, government loans, merchant cash advances, business credit lines and business credit cards are all forms of debt financing, which you must repay even if your company fails.

Equity funding

Equity funding, unlike debt funding, does not require repayment if your business fails. However, you will likely have to grant your funders a seat at the decision-making table. Venture capitalists, angel investors and equity crowdfunding are all forms of equity funding.

You can learn more about the difference between debt and equity financing here.

Key takeaway: Debt funding comprises various traditional loans that require interest payments, whereas equity funding comes with fewer financial risks but requires more ceding control to other parties.

Additional reporting by Max Freedman and Nicole Fallon. Some source interviews were conducted for a previous version of this article.

What Is Business Financing?

Unless your business has the balance sheet of Apple, eventually, you will probably need access to capital through business financing. Even many large-cap companies routinely seek capital infusions to meet short-term obligations. For small businesses, finding a suitable funding model is vitally important. Take money from the wrong source, and you may lose part of your company or find yourself locked into repayment terms that impair your growth for many years into the future.

What Is Debt Financing?

Debt financing for your business is something you likely understand better than you think. Do you have a mortgage or an automobile loan? Both of these are forms of debt financing. It works the same way for your business. Debt financing comes from a bank or some other lending institution. Although private investors can offer it to you, this is not the norm.

Here is how it works. When you decide you need a loan, you head to the bank and complete an application. If your business is in the earliest stages of development, the bank will check your personal credit.

For businesses that have a more complicated corporate structure or have been in existence for an extended period, banks will check other sources. The Dun & Bradstreet (D&B) file is one of the most important. D&B is the best-known company for compiling a credit history on businesses. The bank will want to examine your books and likely complete other due diligence along with your business credit history.

Before applying, make sure all business records are complete and organized. If the bank approves your loan request, it will set up payment terms, including interest. If the process sounds a lot like the process you have gone through numerous times to receive a bank loan, you are right.

Advantages of Debt Financing

There are several advantages to financing your business through debt:

• The lending institution has no control over how you run your company, and it has no ownership.
• Once you pay back the loan, your relationship with the lender ends. That is especially important as your business becomes more valuable.
• The interest you pay on debt financing is tax deductible as a business expense.
• The monthly payment, as well as the breakdown of the payments, is a known expense that can be accurately included in your forecasting models.

Disadvantages of Debt Financing

However, debt financing for your business does come with some downsides:

• Adding a debt payment to your monthly expenses assumes that you will always have the capital inflow to meet all business expenses, including the debt payment. For small or early-stage companies that is often far from certain.
• Small business lending can be slowed substantially during recessions. In tougher times for the economy, it can be difficult to receive debt financing unless you are overwhelmingly qualified.

The U.S. Small Business Administration (SBA) works with certain banks to offer small business loans. A portion of the loan is guaranteed by the credit and full faith of the government of the United States. Designed to decrease the risk to lending institutions, these loans allow business owners who might not otherwise be qualified to receive debt financing. You can find more information about these and other SBA loans on the SBA’s website.

What Is Equity Financing?

If you have ever watched ABC’s hit series “Shark Tank,” you may have a general idea of how equity financing works. It comes from investors, often called “venture capitalists” or “angel investors.”

A venture capitalist is usually a firm rather than an individual. The firm has partners, teams of lawyers, accountants, and investment advisors who perform due diligence on any potential investment. Venture capital firms often deal in significant investments ($3 million or more), so the process is slow, and the deal is often complex.

Angel investors, by contrast, are generally wealthy individuals who want to invest a smaller amount of money into a single product instead of building a business. They are perfect for the software developer who needs a capital infusion to fund their product development. Angel investors move fast and want simple terms.

Advantages of Equity Financing

Funding your business through investors has several advantages:

• The biggest advantage is that you do not have to pay back the money. If your business enters bankruptcy, your investor or investors are not creditors. They are partial owners in your company and, because of that, their money is lost along with your company.
• You do not have to make monthly payments, so there is often more liquid cash on hand for operating expenses.
• Investors understand that it takes time to build a business. You will get the money you need without the pressure of having to see your product or company thriving within a short amount of time.

Disadvantages of Equity Financing

Similarly, several disadvantages come with equity financing:

• How do you feel about having a new partner? When you raise equity financing, it involves giving up ownership of a portion of your company. The more significant and riskier the investment, the more of a stake the investor will want. You might have to give up 50% or more of your company. Unless you later construct a deal to buy the investor’s stake, that partner will take 50% of your profits indefinitely.
• You will also have to consult with your investors before making decisions. Your company is no longer solely yours, and if an investor has more than 50% of your company, you have a boss to whom you have to answer.

What Is Mezzanine Capital?

Put yourself in the position of the lender for a moment. The lender is looking for the best value for its money relative to the least amount of risk. The problem with debt financing is that the lender does not share in the business's success. All it gets is its money back with interest while taking on the risk of default. That interest rate will not provide an impressive return by investment standards. It will probably offer single-digit returns.

Mezzanine capital often combines the best features of equity and debt financing. Although there is no set structure for this type of business financing, debt capital often gives the lending institution the right to convert the loan to an equity interest in the company if you do not repay the loan on time or in full.

Advantages of Mezzanine Capital

Choosing to use mezzanine capital comes with several advantages:

• This type of loan is appropriate for a new company that is already showing growth. Banks may be reluctant to lend to a company that does not have at least three years of financial data. However, a newer business may not have that much data to supply. By adding an option to take an ownership stake in the company, the bank has more of a safety net, making it easier to get the loan.
• Mezzanine capital is treated as equity on the company’s balance sheet. Showing equity rather than a debt obligation makes the company look more attractive to future lenders.
• Mezzanine capital is often provided very quickly with little due diligence.

Disadvantages of Mezzanine Capital

Mezzanine capital does have its share of disadvantages:

• The coupon or interest is often higher, as the lender views the company as high risk. Mezzanine capital provided to a business that already has debt or equity obligations is often subordinate to those obligations, increasing the risk that the lender will not be repaid. Because of the high risk, the lender may want to see a 20% to 30% return.
• Much like equity capital, the risk of losing a significant portion of the company is genuine.

Please note that mezzanine capital is not as standard as debt or equity financing. The deal, as well as the risk/reward profile, will be specific to each party.

Off-Balance Sheet Financing

Think about your personal finances for a minute. What if you were applying for a new home mortgage and discovered a way to create a legal entity that takes your student loan, credit card, and automobile debt off your credit report? Businesses can do that.

Off-balance sheet financing is not a loan. It is primarily a way to keep large purchases (debts) off a company’s balance sheet, making it look stronger and less debt-laden. For example, if the company needed an expensive piece of equipment, it could lease it instead of buying it or create a special purpose vehicle (SPV)—one of those “alternate families” that would hold the purchase on its balance sheet. The sponsoring company often overcapitalizes the SPV to make it look attractive should the SPV need a loan to service the debt.

Off-balance sheet financing is strictly regulated, and generally accepted accounting principles (GAAP) govern its use. This type of financing is not appropriate for most businesses, but it may become an option for small businesses that grow into much larger corporate structures.

Funding From Family and Friends

If your funding needs are relatively small, you may want to first pursue less formal means of financing. Family and friends who believe in your business can offer advantageous and straightforward repayment terms in exchange for setting up a lending model similar to some of the more formal models. For example, you could offer them stock in your company or pay them back just as you would a debt financing deal, in which you make regular payments with interest.

Tapping Into Retirement Accounts

Whereas you may be able to borrow from your retirement plan and pay that loan back with interest, an alternative known as a Rollover for Business Startups (ROBS) has emerged as a practical source of funding for those who are starting a business. When appropriately executed, ROBS allows entrepreneurs to invest their retirement savings into a new business venture without incurring taxes, early withdrawal penalties, or loan costs. However, ROBS transactions are complex, so working with an experienced and competent provider is essential.

The Bottom Line

When you can avoid financing from a formal source, it will usually be more advantageous for your business. If you do not have family or friends with the means to help, debt financing is likely the most accessible source of funds for small businesses.

As your business grows or reaches later stages of product development, equity financing or mezzanine capital may become options. Less is more when it comes to financing and how it will affect your business.

In order to manage these two finances, they should be kept separate from each other so money is easily tracked and personal funds are not consumed by business expenses.

Keep Separate Accounts

Money for a business and money that is spent taking care of a home and family should be maintained separately. This separation helps you avoid confusion when dealing with taxes or other legal payments, holds you accountable for the money that belongs to the business, and helps you keep track of exactly how your money is being spent. This separation also protects your personal finances from business debts or costs if the business does not succeed.

Ways to Keep Accounts Separate

• Have a separate bank account for your business. It is easier to track business expenses if they are on one account, and you will have a clearer picture of your business’s income.
• Have a safe place to keep your money. Talk to other business owners about what banks and savings plans they use.
• Have a good accounting system to help you track your expenses. Talk to others who have successful businesses and ask what accounting systems work for them.
• Give yourself a salary, and make your salary one more business expense.
• Decide ahead of time what amount from your personal savings you are willing to put into a business. Have a set limit to help you determine when a business is not worth spending money on.

Do Not Misuse Business Funds

As the owner of a business, you may be tempted to see all business profits as personal income, but even if the money is under your management, it should not be treated as personal funds. Doing so can create additional risks. For example, if you start borrowing money against the business and then find you cannot pay it back, your business is at risk, as are any investments others have put into it. Below are other precautions to follow with business funds.

Precautions

Have Your Personal Finances in Order

The counsel from the Lord and His servants has always been to have your home and finances in order.

“If you have paid your debts, if you have a reserve, even though it be small, then should storms howl about your head, you will have shelter” (“To the Boys and to the Men,” Gordon B. Hinckley, Ensign, Nov. 1998, 54).

If you want to start a business, here are some advantages to having your personal finances in order.

Advantages