10 Tips on Managing Your Small Business Finances

June 08, 2022
10 Tips on Managing Your Small Business Finances

 

Small business accounting is the most efficient way to not only understand your business performance, but also to attain sustainable growth. While it is a preferable move at the early stages of the business, it is never too late to begin. We have assembled the crucial steps to guide you to master your small business finances.

 

The Complete Guide to Managing Your Small Business Finances

 

Below are the major steps you ought to follow to manage your finances, organize your books for taxation, and grow your business.

 

1. Business registration

 

 

The initial step to getting a grasp on your small business finances is to register the business. You will have to decide which type of business suits you best. The usual types of small businesses include:

 

*  Sole proprietorship: This is an unincorporated business and is solely owned by one owner. Despite the affordability of such a setup, the company is not separated from the owner. You will also be liable for the debts and lawsuits incurred. 

 

*  Limited liability company: Also known as LLC, this type of company contains both aspects of a sole proprietorship and a corporation. It not only allows you to declare your taxes as a corporation, but also separates debts and lawsuits from you as an owner.

 

*  Corporation: In this type of business, a group of people legally act as a single body. The corporation is taxed separately, as your business finances are separate from your personal finances. While setting up a corporation is tedious and expensive, it enjoys lower tax rates.

 

2. Separate your finances.

It is wise to completely separate your personal and business finances. For an LLC corporation, the law binds you to do so by acquiring a dedicated business bank account. On the other hand, for a sole proprietorship, you do not require one but you should get one.

 

What does it mean to separate your finances?

 

*  You should not use your personal bank accounts or credit cards to pay for business transactions.

 

 

*  You should not transfer money from your business bank accounts to your personal bank account.

 

What kind of business accounts should you open for your business?

 

*  Business Chequing Account: For business transactions such as paying company bills (rent and utilities) and receiving payments from your clients.

 

*  Business Saving Account: For saving money for an emergency fund when unexpected expenses hit your business, and for saving money for tax payments.

 

Furthermore, acquiring a business credit card is advisable to build up your credit and earn cash back.

 

3. Picking an accounting method

 

To keep a good record of your small business finances, there are two methods of accounting you can apply. Pick what works best for you and be dedicated to it:

 

*  Cash accounting: This method is the less complicated of the two. All you need to do is record payments received and the expenses when a bill is paid.

 

*  Accrual account: This method requires you to record revenue when it is earned and expenses when they are incurred, and not when the funds are reflected in your bank account. Although it is more complicated to do things this way, the method allows you to accurately visualize your financial status.

 

4. Choose a bookkeeping solution

 

Bookkeeping means keeping a record of all the business expenses as well as earnings. It is paramount to be consistent with one bookkeeping method that works for you. You can choose between single-entry bookkeeping or double-entry bookkeeping to record your transactions.

 

What are the options for managing your bookkeeping?

 

*  Do it yourself. You can do bookkeeping personally through excel or via bookkeeping software. Whatever makes things work easy for you.

 

*  Outsource your bookkeeping. Outsourcing means you can hire a freelancer or part-time bookkeeper to manage your books.

 

*  Hire full-time help. This option is favourable to big businesses where bookkeeping is tedious. An in-house bookkeeper will be the best option.

 

5. Track your expenses

 

It should be a common practice to track all your business-related expenses. When filing for taxes, you can claim your expenses. Your business may incur expenses such as salaries, advertising, meals, office supplies, business insurance, rent, meals, as well as utilities.

 

6. Choose your payment methods

 

To receive payments for your work, you need to choose the best payment method you can accept from your clients. You would want to pick between keeping payments manageable and also affordable. The following options are the most common payment methods: Cash, cheque, credit card, mobile and online payment, and E-transfer.

 

7. Set up payroll

 

Setting up a payroll system caters to the payment of employees or contract workers. The type of employee you hire will directly affect your tax obligation. Therefore, this step is very crucial. 

 

So, what is the difference between an employee and a contractor?

 

*  Employees are workers who are under the control of your company. The company regulates their activities such as work hours and training. Similarly, the company determines their salary and has the power to hire or fire them.

 

*  Contractors are workers who are completely free from the company and can choose how and when they work. They do so through hourly charges or by the job.

 

 

8. Determine your tax obligation

 

How you pay your taxes depends on the kind of business you own and its location. While you will need to research the company’s tax requirements, here are the common taxes levied on a small business: Business income tax, corporate income tax, GST/HST, as well as payroll deductions.

9. Create financial statements

Financial statements are financial reports that reflect the financial performance of your business. These reports can help you foresee how your revenue or expenses will change in the future. This information on your small business finances is critical in making decisions on when to grow your business. 

 

What types of financial statements can you create?

 

Balance sheet: Your balance sheet captures your finances at a specific moment in time. You will get your assets, liabilities, and equity using the formula:

 

        Assets= Liabilities + Equity

 

Income statement: Your income statement will reflect your business income. It can be broken down into revenue, expenses, gains, and losses. It also shows the performance of your business by determining your net income. The following formula can be used to calculate your net income:

 

       Net income = (Total Revenue + Gains)-(Total Expenses + Losses)

 

Cash flow statement: This statement captures the amount of cash flowing into and out of your business. It can be broken down into three types of activities that determine how your business earns or uses cash: investing activities, operating activities, and financing activities.

 

10. Consult a professional

 

If you are still having doubts about how to tackle the management of your small business finances, or if your business is brand new, and you want to start with a clean slate, it is smart to hire a professional accountant. 

 

What financial challenges can a CPA help you with?

 

  • Figuring out the legal structure of the business

 

  • Choosing the right insurance

 

  • Formulating a financial strategy for your business

 

  • How to meet your tax obligation

 

  • Filling your tax returns

 

  • Generating financial reports

 

The basics of business accounting will help you get a clear understanding of your small business finances. This information can help make better choices when hiring employees, investing in equipment, and growing your business. For more information contact us.