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Guide to Managing Small Business Finances in 2022

Getting a small business up and running requires grit, know-how, and an ability to scale with agility. The agility necessary to get a foothold in your market often comes with a cost: neglecting the operations and strategy of small business finance.

In an ideal world, every business would be launched with a detailed plan followed to the letter that exactly maps to the reality of everyday small business management. If you’re a small business owner, you know that this is almost never how things work out. Launching a business is a volatile and unpredictable process, and you go where the business takes you. Through that process, a lot of key business infrastructure is often neglected or even outright ignored, including efficient and strategic management of your small business finances.

Do you have an idea of all of your business’s revenues and costs? Are you armed with projections that inform your short and long-term strategies and priorities? Are the decisions you’re making sustainable? These are the questions that sound financial management can answer. Business decisions are guided by expertise and financial viability.

If you’re reading this article, you’re probably looking for ways to manage your own business finances. You may be a budding entrepreneur with a new business trying to get ahead of the game. Maybe you’ve been running a business for a few years, but you haven’t really taken a step back to think strategically about setting up your business for financial success. We’ve developed a comprehensive guide for small business owners looking to get back on track with their finances so that they’re ready for the next step of their entrepreneurial journey.

Getting Your Arms Around Your Small Business Finances

The first step in managing the financial side of your business is three-fold:

  • What’s Going On? What are your revenues and costs? Where is the money coming in from and where is it going?
  • Are You Sustainable? Given the details of your key revenues and costs, are you set-up for a long term operation?
  • Are You Following the Plan? Think back to your business plan and evaluate if you need to get back on track or even change what you originally wrote down.

At its core, these are the issues financial management is involved with. If you can answer those three questions and deal with their implications effectively, you’re on the right track.

But how do you answer those questions? The first step is to nail down your business plan, whether you have one or still need to make one.

Why Do Business Plans Matter for Financial Management?

Business plans take your business idea and evaluate whether it’s viable. In drafting a business plan, entrepreneurs have to reckon with their target market, how they’re product or service will address the needs in that market, how you will compete, your anticipated sources and amount of revenues and costs, whether or not you'll need a business loan or line of credit, and how you plan to make your idea a success.

In short, a business plan details your business opportunity and the steps that you will take to get from point A to point B.

Notice I said, “point A to point B”. Lots of people think that business plans are only for people in the process of starting a business and that if you’re already up and running haven’t written one, it's not worth doing. In fact, it’s almost more important for current business owners to either draft a plan or revise their original writing!

Business plans are a tool that guides you through every day of small business operations and helps to keep you on track towards your goals. You should constantly reference your plan and adjust as necessary, no matter where you are in the process. Business plans, and constant revision and reference of them, force you to constantly think about where you are where you plan to be in the future.

Most importantly, business plans keep you honest about the state of your finances and help you to use financial information to realize your goals by making it easier to secure business credit at affordable interest rates.

Tim Kelly, a seasoned entrepreneur, agrees:

“Business plans are a road map and help guide (especially new entrepreneurs) through the initial phases of business. If you find that you are not reaching the milestones set forth in your business plan, you need to ask yourself why. Failing to reach business plan goals is not always due to a lack of proper capitalization, but it frequently is. Following your business plan can help you understand when you require additional capital and when to spend it."

Solutions To Take Charge Of Your Finances

Growing businesses are faced with a common issue: how do I manage all of the data and information involved with business operations, and what do I do with it? To get a sense of what’s happening with your business, you need to wrangle all of the essential information from invoice revenue to payroll. Entrepreneurs need to set up the infrastructure that arms them with the financial information needed to run a business effectively.

Make Recordkeeping A Regular Part Of Your Day

It’s important to stay organized and keep track of all of the money going into and out of your business. Keep organized and easy to navigate records of things like past invoices, supplier agreements, business credit cards, and payroll.

Diligent recordkeeping both makes your financial information readily available and is useful when it comes time to secure business credit.

Leverage Business Accounting Tools

As your business grows, handling your bookkeeping and accounting manually can become prohibitively time consuming and complex. Handling invoicing, tracking payments, auditing your cost base, and getting clear data can be overwhelming if you are trying to do it all on your own.

To get a picture of your finances, you need powerful, user-friendly, and report-based tools that can capture all of the relevant data and show it to you in a way that makes it easy to digest and act on.

Lucky for you, there are tons of great products on the market that can do just that. QuickBooks, FreshBooks, and Xero are tools that integrate with your business bank accounts and automate key processes essential to financial management like invoicing, payroll services, and inventory management. They even do a lot of the heavy lifting when it comes to dealing with your business tax obligations, which makes dealing with the IRS that much more enjoyable.

Most importantly, these products also allow you to create detailed and customizable reports that allow you to easily monitor cash flows and expenses. You can build visually appealing and information-dense dashboards and financial reports that detail money coming in and money flowing out of your business. All of this can be done at the click of a button while saving valuable time.

These products aren’t free, but they’re well worth the cost. The right accounting methods can make all the difference in managing your small business.

Consider Hiring Help As Your Business Grows

The accounting software discussed above are powerful and can do a lot to help you organize your business’s financial information, but some aspects of small business accounting can be outside the scope of the typical business owner’s expertise.

Experienced bookkeepers and business accountants can help you review your books for errors, optimize your tax liabilities, and advise you on major financial decisions like securing investments or business credit. They can also help you to build the financial projections necessary to secure loans and plan for the future.

Their services will help you to put together an even more clear financial picture of your business and ensure that you’re covering all of your bases.

If you are considering getting outside help for your small business finances, check out this blog from Biz2Credit that explains when to hire a bookkeeper vs. an accountant.

Planning Your Next Steps: What to Prioritize In The Next Year

Once you develop the infrastructure necessary to understand income, expenses, and other financial aspects of your business, it’s time to use these numbers to inform your decision-making going forward. Armed with key financial data points, you can make financial and business planning in 2021 that much clearer and more effective.

Using Your Financial Data

Many business owners start by asking family and friends to put up money to fund a new business venture. Many times the lenders are willing to provide the money with little or no interest. However, borrowing from your family and friends brings with it the very real risk of strained family relationships and loss of friendship if the company’s finances go sideways.


Revisit Your Business Plan

Remember: first and foremost, a business plan acts as a guide that steers you towards your optimal outcome. Your business plan maps your market, your key revenue drivers, the components of your cost base, your short and long-term goals and milestones, among other things. With that, it’s important to remember that your business plan is a living document. You should constantly be engaging with it to understand if you’re doing all that you need to do to be successful.

"One thing you can be assured of as an entrepreneur, your business plan will change from its original vision. Flexibility and adaptability to change is one of the most valuable traits of a successful entrepreneur. That also means that your fiscal priorities will change. It's so important to have the discipline to step back and update your business plan in accordance with the reality of how the business is evolving and align that plan with your finances."

Once you’ve built the infrastructure necessary to get key financial information laid out in front of you, return to your business plan and evaluate how you’re doing. Think about these questions in the context of the relevant numbers:

  • Were you right about where your revenues would come from?
  • Were your past financial projections accurate and/or realistic?
  • Are you seeing unexpected or unexpectedly large, costs?
  • Given your current and projected finances, is the business sustainable?
  • Have you hit your financial goals and milestones?
  • Given the circumstances, is there a reason to revise your plan?

With the answers to these questions, you can start to evaluate potential next steps for your business.

Are you an aspring small business owner thinking about putting together a business plan. Check out this helpful blog from Biz2Credit that explains everything you need to know about writing your first business plan.


Build Out The Key Financial Statements

With your financial data available, you can put together the three key financial statements for any business. By combing through the relevant documents, you can build these statements to help you get ahead in terms of financial planning.

Balance Sheet: This statement lists all of the assets and liabilities tied to your business. Assets include everything of value that your business owns. They can include anything from inventory to equipment to real estate, but can also include intellectual property or brand value. Your liabilities include anything that you owe to creditors and any paid for services not-yet-rendered. This could include anything from outstanding debt to payroll. The details of this statement help business owners understand their financial position and inform valuation calculations for your business.

Income Statement: Also known as the profit-and-loss statement, the income statement details all of your revenues, gains, expenses, and losses during a set period of time. It gives you a full picture of your current operation’s current profitability and all of the relevant components to that profitability. Income statements guide small business owners through a number of decisions including possible expansions, cost-cutting procedures, and operational reforms.

Cash Flow Statement: A cash flow statement details the movement of funds into and out of your business. It includes the following data:

  • Operating Cash Flow: Any cash flowing into or out of your account from the day-to-day operations of your business. Payments for your services and payments for materials/inventory are included here.
  • Investing Cash Flow: This includes any income or expenses associated with your business assets, including equipment and real estate.
  • Financing Cash Flow: Though this may be less likely with smaller operations, these ah flows involve anything related to a company’s stocks or bonds. These can include dividend payments or equity investments.

Taken together, these three statements provide a full and honest picture of what’s going on with your business. The projections built into these statements are also powerful, as they’ll give you an idea about how your business will progress in the future. The information from these documents will help you to make informed decisions about your small business.

It may be worth enlisting the help of a professional business accountant on a regular basis to help you to compile and analyze these statements.


Develop and Analyze Financial Projections

If you have plans for expansion, the launch of a new product, or to hire more employees, the key question that you need to answer is whether any of these decisions are financially viable. The best way to do this is to make predictions about how your business will perform in the next year.

While financial projections can be complex, complicated, and overwhelming, we’ve listed the two most important projections for small business owners to be aware of, outside of the projections built into the 3 essential financial statements, that inform management decisions for the coming year.

Sales and Revenue Projections

Using the past year, or few years, as a reference, you can predict what you expect to make in the following year. Incorporate the price of your products, the cost of goods sold for each product, and your expectations for the number of customers and sales that you will have in the next year. The results of these projections can have a number of implications.

For example, you may find that your expected sales will be too much for your current salesforce or production capabilities. If this is the case, it’s time to think about hiring some more people or improving your equipment. If the opposite is true, it’s time to think about how you can boost those numbers to ensure that your operations will run at full capacity and what that means for your finances.

Additionally, you could find products in your analysis that are underperforming, doing much better than expected, or that are bogging down resources that could be used better elsewhere. With this in mind, you can make strategic decisions concerning how you can allocate your business’s resources most efficiently.

Budget for Expenses

In this projection, you should look at your operating expenses. The costs of running a business can be broken down into two broad categories: fixed and variable costs.

Fixed costs include things that are constant no matter how much business you do. This can include things like rent or equipment purchases. Variable costs change depending on how much business you do. This includes things like hourly wages for employees, commissions on sales, supplier costs, and distribution costs.

Given your past operating expenses and your expectations for where you will have to spend your business’s money in the coming year, you can project what you’ll need to budget for expenses.

While you don’t need to have super-detailed and exact figures, a general understanding of where you will stand in terms of operating costs for the next year is very important.

For example, you may find that your projected revenues won’t be able to cover expected expansion costs and thus you may need to look into business financing options. Or maybe you will find that a particular product has out of control variable costs that could be improved with a change of supplier agreements. Maybe it's time to contract freelancers to save on labor costs, or launch ecommerce platforms to reach a new audience.

Engaging in diligent expense tracking and analyzing your expenses, or cost-base will give you key information necessary to determine if your business will be sustainable in the long run and inform ways that you could bring down expenses to boost profitability.

3 Tools and Techniques To Take Your Business Finances to the Next Level

As an entrepreneur, you’re always looking for an edge to take your business to the next level.

"When it comes down to it, it's all about finding money and minimizing your costs," says Tim. Smart business owners are always looking for innovative ways to boost their profits and grow their businesses.

Here are three proven strategies and techniques that will give you an edge in managing your business finances.


Avoid Large Fixed Costs Through Strategic Partnerships

If you’ve identified opportunities to expand your operations, the first thing that comes to your mind is the start-up costs. Launching a new product or purchasing new equipment can be very expensive, and the risk that your new opportunity or strategy doesn’t play out financially in your favor can deter most small business owners from pursuing them.

However, if you play it smart you can avoid the initial costs all together while you test new ideas and new products. If you do your homework, you can often find existing capabilities for your new opportunity in the hands of other entrepreneurs like yourself. By partnering with people who have already committed the investment that you have been thinking about, you can both help them to make back their investment and pursue your opportunity while offloading most of the risk!

“When I was thinking about launching my Vodka brand, I was told over and over again that the market was too crowded and that it wouldn’t be worth the huge upfront cost of setting up a distillery. They were right! It was tough to rationalize the fixed cost with the risk that you might not get to the capacity necessary to make things worth it. With this in mind, I found an existing distillery who was looking for ways to up their capacity and partnered with them to produce my product. In one move I sidestepped the fixed costs of launching a Vodka brand and was able to test my product in the market.”

Tim says that this is a key lesson for all entrepreneurs. By finding strategic partners in your target market who have already made the investment you need, you can avoid large upfront costs while still pursuing new, potentially lucrative ideas.


Take Advantage of Business Credit Card Rewards

If you think credit card points are only for clever travel hackers, you’re missing out. While credit card debt can be extremely expensive, rewards programs can be an unlikely source of cash that you can use to improve your finances.

There are tons of business credit cards on the market, all with their own unique perks and rewards. By strategically using credit cards to pay for your expenses, you can earn a substantial amount in cashback.

For example, restaurant owners spend a lot of money paying suppliers for what they need to serve food on a daily basis. If you spend $1,000,000 every year on supplies and can earn 2% cashback by paying for those supplies with a business credit card, you’ll get an extra $20,000 per year to use to fund your financial strategy.

There are plenty of examples of savvy entrepreneurs using this technique. As long as you stay on top of your credit card bills, you can leverage rewards programs and generous sign-up bonuses to boost your finances.


Leverage Innovative Business Financing Options To Supercharge Growth

One of the most common things holding small business owners back from growth and success is a lack of capital. Being proactive about business financing is an important part of diligent financial management. Your analysis of the current state of affairs and projections of the next year should inform whether or not you’ll need an infusion of capital to reach the goals laid out in your business plan.

While traditional banks are an obvious source of funding, your search shouldn’t stop there. There are lots of innovative online lenders (like Biz2Credit!) who focus specifically on providing effective and flexible financing options to small businesses. These lenders often provide more amenable terms, seamless experiences, lower interest rates, and a higher level of expertise when it comes to small business capital.