The Ultimate Guide to Managing Small Business Finances

Some small business owners are already financial experts: they have MBAs, experience in the private sector, and strong literacy in all things related to managing small business finances.

This guide, however, is most generally geared toward the business owners with little-to-no finance experience—the ones who had a passion or a big idea and decided to start a business, but who are now wondering how to manage small business finances effectively (or at all).

If managing your business finances has you feeling completely overwhelmed, take a look at this comprehensive primer. We’ll break down need-to-know accounting terms, how to handle your credit scores, how to apply for a business loan, and more—so that you’ll have all the information you need to manage your small business finances.

Before you can get down to the process of managing your business finances, you need to take an important initial step: You need to separate them from your personal finances. Why is this first step so important? First, separating your business and personal finances is essential for organizational and tax reasons—by keeping these finances separate, you’ll have a much easier time managing your bookkeeping and requirements when it comes to business taxes. Perhaps more importantly, however, separating your business and personal finances has legal implications. When you separate your finances in this way, your personal finances are then protected if you were to ever face legal trouble with regard to your business.

So, with all of this being said, you can separate your personal and business finances by opening a business bank account. Choosing the right bank account for your business is a crucial step to effectively managing your business finances.

How do you know which business bank account is best for you? There are a variety of factors you’ll want to consider:

• Business checking account vs. business savings account
• Monthly service fee and ways to waive it
• Included transactions
• Wiring allowances
• Cash deposit limits
• ATM access
• Online and mobile banking capabilities

Ultimately, you’ll want to choose a business bank account that can not only house your funds but that can also help you manage your business finances on a day-to-day basis.

Keeping all of this in mind, here are some of the top business checking account options you might consider:

For a fee-free, interest-earning business bank account, you might consider Bluevine business checking.

Bluevine’s business account is has no monthly fee, can be opened quickly and easily online, and includes unlimited transactions.

In addition, it has no minimum opening deposit requirement, no NSF fees, and gives you the ability to withdraw cash fee-free at over 38,000 MoneyPass ATMs around the U.S. Moreover, unlike many other online-based business checking accounts, you also have the option to deposit cash through BlueVine’s partnership with Green Dot (for a fee).

Another significant way you can separate your personal and business finances is to get a business credit card. With this card, you’ll be able to make purchases for your business and only for your business. By using a business credit card, you’ll be able to simplify your bookkeeping, as well as establish your business credit. You may choose to get a business credit card from the same provider as your business bank account, or you might explore alternative options.

On the whole, there are a variety of different business credit cards for you to choose from—cash back rewards cards, travel rewards cards, cards for bad credit, and more.

The next step to managing your small business finances is to understand the basics of small business accounting. Although this may seem like a daunting task—especially if you’ve never taken an accounting class—there are some basic accounting terms and documents that aren’t too difficult to learn. Plus, by reviewing these essentials, you’ll have a much better handle on how accounting affects your business finances and, therefore, will be in a better place to choose an accounting software and bring in a professional, if necessary.

As you dive into the world of small business financial management, there are several buzzwords that will likely come up over and over again. If you’re unfamiliar with the terminology, many of the other processes you need to manage your business finances will be all the more overwhelming. This being said, then, let’s begin this section by explaining a few basic accounting terms:

Also called total revenue, your gross revenue is the sum of all funds you’ve received from customers in exchange for your product or service, before taking any deductions or expenses (such as rent, cost of goods sold, taxes, etc.).

In the simplest terms, expenses are everything that keeps your gross revenue from going straight into your pocket—things like rent, payroll, costs of materials for goods sold, taxes, interest on debt, utilities, and other operating expenses.

Sometimes called the bottom line, net income, or net earnings, net profit is essentially what is left over after you deduct your expenses from your total revenue. When this number is positive, it means that your revenue is greater than your expenses, and your business is profitable.

Beyond basic profitability, having enough cash on hand can often make or break the success of a small business—even if your business is profitable, you can run into issues if you don’t have enough cash in your bank account to pay your bills.

Your cash flow is the difference between the available cash at the beginning of an accounting period compared with at the end of the period. Cash comes in from sales, loan proceeds, investments, and the sale of assets, and goes out to pay for operating and direct expenses, principal debt service, and the purchase of assets.

For the first several months (or even years) of doing business, many small businesses will operate at a loss—meaning their expenses are greater than total revenue. The break even point is the production level at which total revenues equal total expenses. This is typically the turning point to profitability—an important milestone in the life of every small business.

Managing a small business, especially your business finances, involves a lot of paperwork. You’ll need accounting documents to file your business taxes, apply for business financing, and for internal tracking of your revenue, expenses, and profitability. These are the four main accounting documents that every small business owner should regularly maintain:

The balance sheet is essentially a snapshot of your business’s financial standing at a given moment. It lists the assets, liabilities, and equity your company holds and is used to calculate the net worth of your business.

Maintaining a “balanced” balance sheet—one in which total assets (everything your business owns) equals liabilities plus equity—is the foundational tenet of basic bookkeeping.

Sometimes called a profit and loss statement, your income statement summarizes your business revenues and expenses over the course of a year, allowing you to calculate your net profit or loss for that year. Maintaining an accurate income statement is critical to determining the break even point for your new business, as well as measuring profitability over time.

We mentioned earlier that having enough cash on hand to cover expenses can make or break a company’s financial health—and in fact, this issue is so important that there’s an accounting document dedicated to the tracking of cash flow.

Your cash flow statement reflects the inflow of revenue and outflow of expenses resulting from all your business activities during a specific time period—usually a month or a financial quarter. Inflow will come from selling goods and receiving payment on invoices, while outflow comes from things like purchasing inventory, payroll, and paying marketing costs and other overhead expenses.

Can you afford to hire a new employee or launch a new marketing campaign? If you were to take on a business loan in the coming months, what monthly payment amount could you reasonably handle? These questions, and many more, cannot be answered with any degree of accuracy without a revenue forecast.

A revenue forecast is an educated prediction for the upcoming year about how much money your company will likely bring in, so that you can estimate what you can afford to spend, and what your profit margin will be. The more thoroughly researched and realistic your forecasting is, the easier it will be to stay on budget throughout the year.

Keeping track of your accounting documents above can become overwhelming if you’re trying to manage everything manually.

Thankfully, there are several great accounting software options available that will take the guesswork out of your bookkeeping. Using these cloud-based software services, you can have all of your most important accounting documents just a few clicks away, generate them automatically, and handle invoicing and other bookkeeping needs. With all of the processes involved with managing your business finances, you’ll save significant time and effort by utilizing an accounting or bookkeeping software.

Therefore, check out our favorite cloud-based accounting options for small business owners:

QuickBooks Online is simple enough for small business owners to use, but accountants love it too. You can view the status of your finances at a glance using dashboards or create customized reports. You can also generate invoices, accept payments, process payroll, and import expenses by simply taking pictures of receipts with your phone.

Plus, QuickBooks Online syncs with your bank accounts and credit card accounts so data is always up to date. You can also share QuickBooks Online with your accountant to simplify tax time.

Pricing starts at $15 per month.

FreshBooks started out as an invoicing and expense tracking product but has now expanded to include bank account integration, report creation, payroll processing, and time tracking. This accounting tool targets business owners who want a very simple accounting software and free customer support from real people. Plus, Freshbooks integrates with popular apps for CRM, customer service, and more.

Pricing starts at $15 per month if you pay month-to-month, or $13.50 per month if you sign up for a yearly membership.

This fully featured accounting tool also uses dashboards, generates reports, creates invoices, handles payroll and expenses, and syncs with your bank account. The biggest differentiator? You can add as many users as you want for free. Another perk: Xero integrates with the largest range of add-ons to automate tasks such as time tracking, mobile payments, and more.

Xero’s pricing starts at $9 per month for their basic plan.

Although the right accounting software can work wonders to help you manage your business finances, there are some areas of accounting that are beyond the capacity of the average small business owner. Therefore, it’s often in your best interest to hire a professional business accountant to review your books for errors at least annually, help with tax filings, and make recommendations for major financial decisions. Even if you’re just starting out, or even if you have a background in accounting or finance, it’s always worth consulting a professional at least a few times a year to ensure that everything is accurate and up to date.

To find an accountant for your business, you can ask your attorney, banker, or a fellow business owner for a recommendation, or contact the Society of Certified Public Accountants in your state for a referral. The person you choose should be a certified public accountant (don’t assume every accountant is) and licensed to practice in your state. You can ask if you can call a few clients to check references and make sure you are clear about the individual’s fees for services.

In addition to these basics, building a great accountant-client relationship requires the right personality fit. How accessible will your accountant be to answer questions? What areas of your finances will he or she handle, and what will you keep in house? You’ll want to limit future confusion by discussing each of these issues before you make a selection.

All of this being said, however, no matter what responsibilities you decide to hand over, it’s essential that you stay personally involved in your small business finances, and that you have checks and balances in place to avoid business identity theft or fraud. Although you may be eager to get as much financial management off your plate as possible, being too hands-off with your small business accounting can make you a target for individuals with unsavory intentions.

After you’ve separated your business and personal finances and organized your books, understanding and fulfilling tax requirements will be the next process you’ll want to tackle to manage your business finances. Although taxes are often one of the most cumbersome and confusing parts of small business finance, the consequences for failing to file your state and federal business taxes are severe—you could lose your business and even face criminal charges.

Therefore, here’s what you need to know about paying business taxes:

Also known as your employer identification number (EIN for short), this number helps the IRS keep track of your business for tax purposes. You can think of your EIN as a social security number for your business.

Although not all businesses need to apply for an employer identification number, there are some circumstances where you may need to file for an EIN even if you don’t retain employees—especially if your business is established as a corporation or partnership. You can consult the IRS website to determine whether or not you need an EIN, and you’ll also apply for this number through the IRS. Keep in mind, though, there are benefits of getting an EIN even if you don’t need one.

There are four general types of taxes levied by the federal government, and the type of business you run determines which taxes you must pay, when forms and payments are due, and how you’ll file those taxes. Although not every one of the following types of business taxes applies to every business, it’s important to know what they are and understand how they might impact your small business finances.

All businesses must file annual income tax returns and make payments based on revenue received. The exact tax form you use to make income tax payments depends on the structure of your business: sole proprietorship, partnership, corporation, S-corporation, or LLC.

Business income taxes are “pay-as-you-go” taxes, meaning you’ll need to make estimated tax payments quarterly. (See below for additional information about filing estimated taxes.)

Individuals who work for themselves must pay social security and Medicare taxes via a self-employment tax. This tax is similar to the taxes withheld from the pay of most wage earners.

Income and self-employment taxes both qualify as “pay-as-you-go” taxes. You’ll need to file quarterly documents estimating the taxes you owe and make payments accordingly.

If you have employees working for your business, you will have additional tax obligations related to those employees, including social security and Medicare taxes, federal income tax withholdings, and the federal unemployment tax.

Depending upon what type of business you run, what products you sell, and the types of equipment you use, you may or may not be required to pay excise taxes for your business. Excise taxes most often apply to businesses with heavy fuel usage, but can also apply to such businesses as indoor tanning salons, manufacturers of archery equipment, and more.

In addition to federal business taxes, most U.S. states and territories will require you to pay income and employment taxes for your business. Certain states have additional fiscal requirements, such as state-mandated workers’ compensation and unemployment insurance.

Registration, requirements, and filing procedures vary widely from state to state, but you can learn more about what specific local taxes you’ll be required to pay through sources like the SBA or your state’s chamber of commerce website.

As you might imagine, each of these different taxes will have related forms that you’ll need to complete within a certain deadline as set out by the IRS or other local tax authorities. Plus, as we mentioned earlier, the specific tax requirements that apply to your business will depend on your business entity structure as well as other qualifications unique to your operations. Although many accounting software platforms have tools to help you manage your tax obligations, this is an area of your business finances where you’ll benefit greatly from consulting an accountant or other tax professional.

The next step to managing your business finances is understanding and getting a handle on your credit scores. Whether it’s a property or equipment lease, a business credit card, or a small business loan, at some point over the life of your business you’ll need access to credit. Your ability to qualify for business financing of any kind will be dependent upon your personal and business credit rating and history—and both scores are inherently tied to how well, or poorly, you’re managing your small business finances.

This being said, then, here’s what you need to know about maintaining solid personal and business credit to maximize future borrowing options for your small business.

As the business owner, your personal credit history has a huge impact on your business’s ability to qualify for credit products. Even if your business has great credit, lenders will look into your personal credit as a measure of your ability to pay back a business loan—and the higher your personal credit score is, the more and better loan products you’ll have available to you.

So, managing your personal credit rating is a key component of how to manage business finances effectively. Here are some tips on improving or maintaining that all-important number (and even attaining a perfect credit score):

• Pay all your loan bills in full and on time
• Avoid FICO demerits like loan defaults, bankruptcy, judgments, collections, and foreclosures
• Keep spending on all your credit and store cards as low as possible in relation to your credit limit
• Don’t max out your credit cards
• Monitor your credit reports regularly for any discrepancies or irregularities, and contact the bureau ASAP if you find a mistake
• Having a mix of credit is healthy for your score—but only if you can reliably repay all that debt

Beyond this, there are a few other “hacks” that may offer a quick boost to your credit score, such as increasing your credit limit (without increasing your spending) and addressing dormant accounts that may be hurting your rating. But overall, the best thing you can do to maintain a great personal credit score is to make all debt payments on time, every time—both in your business and for your personal finances.

In addition to your personal credit score, as a business owner, you’ll also want to establish business credit, which you can start doing after you’ve obtained an employer identification number. Like your personal credit score, your business credit score is a measure of how well or poorly you honor your debts, and it’s an important factor in determining your eligibility for future business financing—but this time, it’s your business that’s under the microscope, not you as an individual.

In this case, the credit bureaus cull information about accounts held under your business’s name from sources including your vendors, trade associations, business credit card companies, and business lenders. To monitor your business credit rating, which you should do at least every six months if you plan to apply for financing in the future, the leading resource is Dun & Bradstreet. If you encounter an error, you’ll want to contact the agency for a correction.

Finally, with these four steps under your belt, you’ll want to take your business finances to the next level. At some point in the financial trajectory of your business, it’s likely that you’ll need to seek financing in the form of a small business loan—whether that’s to deal with short-term cash flow challenges or to fund the growth of your business.

Every type of business loan and lender has different eligibility requirements, including minimum credit scores and annual revenue. Therefore, you’ll want to understand the types of loans out there, and what you’ll need to qualify—so that you can better organize your business finances from the start of your venture—and this way, you’ll have a financial goal to work toward as you build.

Brick-and-mortar banks used to be the only game in town for small business borrowing. But in the wake of the 2008 financial crisis, more and more small businesses have been unable to qualify for funding through traditional banks. This challenge, along with over-regulation by traditional banks, gave way to a boom in online alternative lending to fill the gap in the availability of small business funding.

This is not to say, however, that you can’t still secure a loan through a traditional bank. If your business has been operating for a while and you have a solid credit rating, a traditional bank may be able to offer you great terms. But, if your credit is less than stellar or you’ve been turned down by your local bank, there are other options available.

Whereas traditional banks tend to have pretty stringent and specific terms for what loans they will and won’t approve, many alternative lenders are willing to consider a wider variety of factors in making loan approval decisions.

With the exception of SBA loans, the loan eligibility standards we’re mentioning here are based on loans offered by alternative lenders, not by banks.

A term loan is likely the first thing you think of when you imagine business lending. Term loans offer a set repayment time, a set number of monthly payments, and have a fixed or variable interest rate. Depending on your business needs, credit rating, and other factors, there are a wide variety of term loans available to many small business owners, with terms ranging from one to five years.

Most approved borrowers of term loans we’ve seen here at Fundera have had the following stats:

• Annual revenue: $300,000+
• Credit score: 680+
• Time in business: 3+ years

If you’re looking for financing specifically to purchase equipment for your small business—including computers, machinery, and much more—equipment financing may be the right choice for you.

Equipment financing works very similarly to a car loan. The amount you can borrow depends on the price and type of equipment you’re borrowing, and because the equipment itself serves as collateral, you likely won’t be asked to put up additional collateral. Equipment financing terms typically work at a fixed interest rate—usually between 8% and 30%—with a fixed term length so your payments will be the same from month to month.

Most approved borrowers for equipment financing had these stats:

• Annual revenue: $130,000+
• Credit score: 630+
• Time in business: 2+ years

For businesses with relatively small and immediate financing needs, short-term loans can be a lifesaver. These loans work similarly to traditional term loans, but cover amounts in the $2,500 to $250,000 range with terms of between three and 18 months. Short-term loan providers can often get you to cash-in-hand in as little as a single day, allowing you to make rent, cover payroll, or meet other immediate overhead expenses even when sales are slow and cash is tight.

To be eligible for short-term financing, you might need stats similar to these:

• Annual revenue: $150,000+
• Credit score: 600+
• Time in business: 2+ years

Other than a business credit card, you’d be hard-pressed to find a more flexible funding source than a business line of credit. With these replenishing resources, lenders give business owners access to a predetermined amount of funds, from which they can draw down whenever they want, and in whatever amount they need. You’ll only need to repay the funds you use, plus interest. You can use your line of credit to cover unexpected expenses, payroll, general working capital, or to take advantage of sudden opportunities.

If you’re interested in applying for a business line of credit, your lender might be looking for stats like these:

• Annual revenue: $180,000+
• Credit score: 630+
• Time in business: 1+ years

The SBA is a great resource for small business owners for everything from writing a business plan, to finding a business mentor, to securing financing for your small business. However, it’s a common misconception that the SBA itself actually loans funds to businesses.

In reality, the role of the SBA in the SBA loan model is to guarantee a percentage of the loan on behalf of the borrower—meaning if you default on your loan, the SBA promises the lender that it will cover the cost up to a certain amount. The loans themselves, however, are financed by banks or other lending institutions, not by the SBA.

Although this guarantee may make some lenders more willing to consider applicants who don’t fall within their strict loan criteria, applying for an SBA loan still involves lengthy paperwork, and the process can take several months. If you apply, lenders will review your personal and business credit histories and financial statements, and they may require collateral to secure the loan. Despite the government guarantee, not all small businesses qualify for SBA financing.

The SBA offers a variety of loan programs to suit a variety of different business demographics and needs, but the most common is the SBA 7(a) loan, which provides business owners with basic working capital.

In addition to meeting basic SBA loan eligibility requirements, most approved SBA 7(a) borrowers came to their lenders with stats along these lines:

• Annual revenue: $180,000+
• Credit score: 680+ (but the higher, the better)
• Time in business: 4+ years

To mitigate the risk of borrower default, many lenders will require small business owners to offer collateral or a personal guarantee in order to be approved for funding. Collateral refers to a specific asset that is leveraged to guarantee a loan—such as your house or other high-value personal property. If you put up your house as collateral and then fail to pay back your small business loan, the lending institution can hire a lawyer, get a judgment in their favor, and repossess that property as repayment for the loan.

By contrast, signing a personal guarantee means that the lending institution can leverage any and all assets you have now and in the future to seek repayment for a defaulted loan—either up to a fixed, pre-determined amount (limited personal guarantee) or for the full amount of the loan and interest owed (unlimited personal guarantee). This may include your life savings, retirement, personal property, your children’s college fund, and in some cases even assets owned in your spouse’s name.

Because the terms are more ambiguous, personal guarantees are generally riskier for borrowers than a standard collateral agreement.

Even if you have full confidence in your small business’s prospects for success, signing a collateral or personal guarantee agreement has serious implications for your financial future. In this case, then, you’ll want to make sure you understand exactly what you’re signing and also be sure that you’re comfortable with the terms.

Small business loans aren’t the only way to finance your small business. Here are just a few of the alternatives you might consider to cover the initial costs of your latest business venture—and which you’ll likely have an easier time being approved for when you’re starting up:

Every day, thousands of investors and venture capitalists are contributing both finances and expertise to what they see as the “next big thing.” If your business idea has a high chance of profitability, you may be able to spark the interest of an equity investor, such as an angel investor.

If your family and friends seem supportive of your business venture, they may be willing to invest funds to help your business succeed. Of course, accepting funds from friends or family comes with its own set of challenges. Even when everyone has the best of intentions, loss of income from a failed business deal can ruin relationships.

Should you choose to go this route, you’ll want to do everything you can to keep it professional. You can offer a professional-quality investment proposal as you would to any other investor, and set the exact terms of the investment in writing. That way, you’ll face less risk dealing with miscommunications or relational challenges down the line.

Maybe you have a network full of acquaintances and contacts willing to contribute to your business venture in smaller amounts. Don’t underestimate the value of a few hundred $50, $20, or even $10 pledges toward your overall fundraising goal. That money adds up fast. And if your crowdfunding campaign goes viral—catching the attention of folks outside your immediate network—the possibilities grow even further.

Platforms like Kickstarter and IndieGoGo are great for smaller ventures seeking contributions. Larger-scale ventures might consider equity crowdfunding platforms like EquityNet, which sells company equity to capital investors in a crowdfunding format.

The available options for funding your business may have you dreaming of possibilities for growth. But before you can move forward, it’s important to determine what your loan costs, and whether you can afford it. After all, planning is a key part of managing your business finances. This being said, here’s what you need to know in order to analyze the affordability of your potential small business loan.

You’ll want to make sure you understand the terms of your loan before you sign and use a loan amortization schedule ahead of time to determine what your payments will be. Depending on the terms of your loan, you may be expected to make monthly, weekly, or even daily payments on principal and interest. For some loans, your payments will be a fixed amount every period, while others will fluctuate over the life of the loan.

If you’re managing debt from multiple sources—such as a business loan, business credit cards, and lease payments—our business debt schedule template can help you track payments and make sure that you have the cash on hand to cover all payments as they are due.

In a business context, the debt service coverage ratio (DSCR) is the ratio of cash a business has available for servicing its debt. Lenders use this ratio when reviewing your loan application to determine whether your business can afford the loan you’ve applied for.

To calculate your debt service coverage ration, first calculate your EBITDA (earnings before interest, taxes, depreciation, and amortization), then divide that number by the sum of your interest and current maturities on long-term debt. If you’re looking at applying for a particular loan, factor the terms of the loan into the equation to see how it affects your debt service coverage ratio.

Typically, lenders look for a ratio of at least 1.25. This demonstrates a cushion so that if you have a slow sales month or an unexpected expense comes up, you’ll still be able to make your loan payment. If you’d like to be more conservative, aim for a loan that leaves you with a DSCR of 1.35 or even 1.5.

Even if you can technically afford to make monthly payments on a business loan, that doesn’t always mean that taking on the loan is a good idea for the financial future of your business.

Using basic information about your loan—including the amount, interest rate, and term—as well as basic revenue information about your business, you can complete a loan performance analysis to estimate when you’ll break even on the cost of the loan, your expected monetary gain, and the approximate profitability of your loan on a five- or 10-year horizon. If the impact over your preferred time horizon is profitable, then that might be a good reason to take the loan.

No matter your background, managing your business finances can be one of the most daunting parts of entrepreneurship. Luckily, if you’re feeling overwhelmed, you can contact SCORE or a Small Business Development Center for information about being paired with a mentor. Working with a veteran entrepreneur one-on-one is a great way to overcome the learning curve associated with managing small business finances.

At the end of the day, however, it’s important to remember that managing your business finances is a step-by-step process—you don’t have to become an expert overnight and you’ll likely learn most effectively as you go along through the life of your business. When in doubt, though, you can consult the five different pillars we’ve discussed here:

• Separating your business and personal finances
• Managing your business bookkeeping and accounting
• Understanding and paying your business taxes
• Managing your personal and business credit scores
• Understanding your business financing options

Ultimately, when it comes to financial management—plan ahead, review everything thoroughly, and consult an expert when needed—are three mottos you can live by regardless of what aspect of your business finances you’re dealing with.