One aspect of running a business that’s always been tougher for me is managing my small business finances. My first job out of college was your typical “office job”—my taxes and 401K contributions were taken from my paycheck. Filing taxes was a breeze, I never paid any late fees on missed payments because there were no additional payments I had to make.
Then, I opened my very first web design business, and was thrown into a world that I literally knew nothing about.
Sales tax? Estimated payments? Salaries? LLCs?!
It’s a lot, and it’s something I hear from new entrepreneurs a lot, so I wanted to dedicate a post to how I manage my small business finances. Not because I’m some sort of expert, but because sometimes it’s just nice to see what other people are doing. Plus, I’ve been doing this for quite some time now and have learned (often the hard way) what works for me.
You absolutely do not need to do things the same way as me, but hopefully this gives you some tips on how to make finances and taxes easier as a business owner.
How I Manage my Small Business Finances
Open a Separate Bank Account
First thing’s first. If you’ve got a business, it needs its own bank account. Thankfully, setting up a business bank account is pretty easy. I found it helpful to go to the bank so a banker could walk me through it and make sure I didn’t miss anything important. Plus, this ensured that I got things set up right the first time.
Keeping all of your business earnings and expenses in one account also makes your life so, so, so much easier. I remember my first year going through my personal account trying to remember which expenses were personal, and which were for my business. It was a nightmare.
Opening an account is also a big statement to the Universe! It’s you saying, I’m doing this—for REAL!
I set up a business debit card, but you can also apply for a business credit card. The point here is simply to keep all your business financials in its own bucket. Your accountant will thank you!Income Reports
I don’t use any fancy software over here, just a simple spreadsheet. Depending on your business, this may or may not be a good idea. I don’t have hundreds of invoices or transactions each month. So, a spreadsheet is easy for me to keep up with. If you do have a lot of transactions or expenses, Quickbooks or a similar software might be just what you need.
I actually did try this a few years ago and I found it so confusing, so for now, I’m sticking with my spreadsheet! I do categorize everything so when it comes time to do taxes, everything makes sense for my accountant.
Hire an Accountant to Handle Small Business Finances
Sometimes you have to play to your strengths and let go of the things you’re not as good at. For me, that’s accounting. It stresses me out, plus, it’s just not where I want to spend my time and energy. A few years back I hired an accountant and it has saved me so much headache, and money too! Before, I found myself paying penalties on things I didn’t even know I was supposed to pay, which was SUPER frustrating.
Hiring an accountant has allowed me to focus on what I’m good at, and let someone else handle the stuff I’m not so great at!
Pay Estimated Quarterly Taxes
If you’re self-employed, you need to pay estimated quarterly taxes. I work with my accountant each year to estimate what we think I’ll make that year based off the previous year. He gives me a number, and I make sure to pay that on time each quarter. If you don’t, you do get penalized and those penalties can add up fast.
Always Keep Money in My Business Account
I aim to always to keep enough money for my next estimated tax payment, plus some extra on top of that in case of unexpected payments. Everyone will have a different number, but figure out what that safety number for you is, and make sure you’ve always got at least that much in your business account.
Pay Yourself First
This phrase actually used to confuse me, but then I dug a little deeper and it made sense. Obviously, we want to get paid for our work, so first, pay yourself a salary. This is something that you can discuss with your accountant and decide what a good salary is.
But the “pay yourself first” definition I’m talking about is a personal finance strategy to first save or invest, before you make other monthly payments or use that money for something fun. According to this article, paying yourself first promotes frugality and consistent savings and investing. When we save and invest consistently, our wealth grows and multiplies faster.
This doesn’t have to be a massive amount each month. But, find a number that works for you and make sure to automatically save or invest that money each month. To make this easier for myself, I set up autodrafts to my investment account. Each month, I know a certain amount goes in there and I never think about it. I don’t even see it! What’s great about this is that I look up and realize, wow, I’ve invested so much more than I realized this month—how cool is that?!