As an entrepreneur, it is pertinent you know that the first few years for your new business are crucial to its long-term success, with many challenges to overcome and lessons to be learned.

Cash flow problems and mismanaged finances are major causes of business failure in the early years. Some companies fail to plan properly, some set their sights too high or low, some don’t keep track of costs, some fail to chase payment.

You can maximize your chances of business success by being aware of the pitfalls. Then you can manage your company’s finances carefully and keep a close eye on its cash flow. Taking sensible, practical steps will help you control spending and grow your business without taking excessive financial risks. Here are some useful tips to consider.

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).

Steps on How to Manage Your Small Business Finances

Separate Your Business and Personal 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 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 finances are then protected if you were to ever face legal trouble about your business.

Open a Business Bank Account

You must know that your business needs to have a different account from your personal account. 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.

Understand Business Accounting:

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, however, 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.

Use financial planning and forecasting

It’s useful to develop a financial plan or framework to keep track of finances coming into and out of your company. For example, one model for your business might be to spend:

  1. 50 percent of revenue on expenses (such as payroll or supplies).
  2. 30 percent of revenue on building the business (such as the expansion of equipment or recruiting costs).
  3. 20 percent of revenue in the future, for developing new products and services.

The truth is, different plans work for different businesses, and you should discuss this with your accountant to see what works best for you.

But circumstances change. When they do, your financial plan should change too. Try to conduct some simple forecasting of your business for at least the next six months. Be realistic and try to estimate how much you will sell and how much you will spend. Plug these numbers into your financial plan and see if the results will still work for your business. If not, you may need to change your plan.

Be Ambitious But Stay Realistic

Ambition and enthusiasm are important characteristics of business owners and managers. But so is the ability to make rational financial decisions based on the facts. When you start a new business the feeling of control can be exhilarating. Free from the constraints of employment, you can make any financial decision you want to. Some of those decisions will be good. Others won’t.

Like any other area of life, learning to run a business comes through experimentation, successes, and occasional mistakes. The mistakes are important, if you read any successful entrepreneur’s autobiography or biography, mistakes will feature highly.

But successful entrepreneurs have two things in common: they learn from their mistakes, and they make small enough mistakes that they can recover from financially.

This is a pragmatic approach to doing business. Few large companies became large overnight. They grew over some time, with setbacks along the way. Taking the occasional risk is part of good business. Taking unnecessarily big risks is not.

Pay Business Taxes

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.

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