Guide to Managing Business Finances

Learning how to manage business finances effectively can improve your chances of surviving in a competitive marketplace—even if you're outsourcing accounting and bookkeeping needs.

Whether you're just starting out or are about to take your business to the next level, properly managing cash flow can help you build a strong financial foundation for years to come. These strategies will help get you there.

Learn key metrics

An essential principle of any sound business money management strategy is learning the definition of key metrics that can help you assess your financial progress as you grow. Here are some key terms to understand.

• Cash flow: This is the amount of money that comes into and leaves your business each month. If you bring in more than you send out, you're cash flow positive.
• Expenses: These are the typical costs of running your business and include things like utilities, shipping costs, packaging, annual licensing and manufacturing costs.
• Gross revenue: This is the total revenue your business brings in before deducting expenses.
• Profit: Subtract expenses from gross revenue to determine your profit.
• Break-even: Your business breaks even when it generates enough revenue to cover your expenses for the same period, whether it's a month, quarter or year.
• Balance sheet: This snapshot of your business's worth includes all assets, liabilities and net equity.
• Profit-and-loss statement: Also known as an income statement, this shows revenue, expenses, profits and losses to illustrate how much money your business is making or losing in any given time period.
• Cash flow statement: This analysis of your business's liquidity details how much cash you have on hand to meet monthly debt obligations. Lenders also use it to determine if you're a reasonable lending risk.

Add business banking

Now that you understand key metrics, it's time to establish a business banking account to help manage cash flow. Separating your personal and business finances will help you simplify bookkeeping, avoid overspending and paint a clearer picture of where your business stands financially.

To set up a business banking account, you'll need an employer identification number, or EIN, from the IRS. You'll also need to register your business in the state where you operate, as well as provide organization papers when opening your account.

Establish payroll

To further separate business and personal expenses, it's wise to set up payroll services and pay yourself as an employee. This way, you'll withhold income taxes throughout the year and will be less tempted to treat your business bank account as a piggy bank when you need a little extra cash.

Decide who handles accounting

Well-kept books create a foundation for better business decisions. As you're considering how to manage business finances, you'll need to decide whether to keep the books yourself or outsource it. There are advantages and disadvantages to both.

Do-it-yourself accounting

Doing accounting for your business is often more cost-effective, and you'll have more control over when taxes and other necessary business filings are complete. However, the hours you spend managing your books may be better spent on activities that drive more revenue for your business.

In-house accounting

Hiring an in-house accountant means you'll have a dedicated employee to handle this critical business need—someone with expertise who can help you find tax savings and ensure you meet regulatory requirements. On the other hand, hiring a staff accountant means more overhead for your business, which also means you'll need more revenue to justify this cost. You also may not have complex accounting needs that justify a full-time employee.

Third-party accounting

Using a third-party accounting service can be beneficial if you have complex accounting and bookkeeping needs, and it can be more cost-effective than hiring additional staff. Whether you hire an independent accountant or large firm, you'll save time and gain access to expertise. But you'll also lose a level of control, and these services can also be costly—even though they may be more affordable than adding employees.

Track business expenses

A business expense is considered any cost incurred as a necessary part of conducting business. It could be a lunch meeting with a client, transportation to visit a satellite office, travel expenses for an on-site demonstration or attendance fees for a conference. You'll need to account for these costs so you can monitor the growth of your business and keep track of deductible expenses to help prepare tax returns.

The exact way you categorize business expenses depends on the goods and services you use to run your operation. However, here are some broad categories most businesses share.

• Vendors: You'll need to pay other companies for services like accounting, advertising, online services and graphic design.
• Office needs: Think of these costs as the physical—and digital—goods you need to operate your business. Rent and utilities for your office space fall into this bucket, but so do things like office phones, employee computers and software.
• Employee expenses: This includes not only salaries but also benefits packages, bonuses, recruitment and employee education programs.
• Day-to-day costs: You'll encounter some smaller everyday expenses as you run your business. For example, you may need to pay for travel, meals while traveling for work or printing costs for promotional materials.

Items that are partly for personal use—like a phone, car or home office—must reflect this mixed use. You can only deduct the percentage of the cost that you use that device or space for business. For example, if you use your phone 75% of the time for personal reasons and 25% of the time for your business, you'll only be able to count 25% of the cost as a business expense.

Organizing business expenses

It's also important to implement a system to organize both paper and digital receipts, as well as other expense documents. Tips for tracking business expenses include:

• Setting up a dedicated business bank account and business credit card
• Linking your bank account to your accounting software to automatically import transactions and track expenses
• Using software to categorize expenses and keep them all in one place
• Reviewing and categorizing business expenses regularly

Even if you use accounting software or apps to track expenses, get into the habit of reviewing business expenses regularly. Also be sure to review bank statements against your expense ledger each month to ensure you've accounted for all transactions.

The bottom line

With these strategies and business financial management tools at your disposal, you'll be able to track your business expenses consistently and accurately. Knowing where you stand financially is a powerful asset as a business owner—and one that can help steer your business in a more profitable direction.