Everything You Should Know About Managing Small Business Finances

Last Updated: 

December 14, 2023

An inability to grasp common concepts of financial management is a sure recipe for failure in any business. You might have a viable business idea but managing your cash does have an impact on success, especially if you are bootstrapping. The sad stat is that only two-thirds of small businesses make it to the five-year mark! Many small businesses inevitably fail due to a lack of cash flow or poor financial management. This is why it is crucial that you make sound financial decisions from the onset rather than wait until your business starts to pick up the pace. We are here to help you get right on track. We will tell you a few key financial management aspects you should know as a small business finances owner or leader.

Key Takeaways on Managing Small Business Finances:

  1. Familiarise yourself with common financial terms: Understand key concepts like VAT, annual accounts, and income tax rates, and be aware of your tax obligations in your country of operation.
  2. Master small business accounting basics: Maintain proper bookkeeping, manage payroll, and prepare financial statements. Consider hiring an accountant for expert advice on business growth.
  3. Monitor financial documents: Keep track of important documents like profit and loss statements, breakeven analysis, balance sheets, and cash flow statements to assess business viability and identify potential risks.
  4. Manage cash flow effectively: Ensure that your business spends less than it earns, and maintain a supplemental source of income, such as a savings account, to support your business during challenging periods.
  5. Manage debt responsibly: Cut back on unnecessary expenses, prioritise high-interest loans, and negotiate with suppliers for discounted rates. Maintain a rainy day fund to cover unexpected costs.
  6. Explore various finance options for your small business: Consider debt financing, equity financing, crowdfunding, invoice finance, venture capital, bank loans, and small business grants to secure funds for your business.
  7. Prioritise financial management: Understand the numbers driving your business, make informed decisions, and hire financial experts to ensure effective financial management and business growth.

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Definition of common terms

For starters, you should know a thing or two about financial aspects affecting your business. Regardless of whether you want to hire an accountant or want to handle your small business finances by yourself, the following are some basic accounting terms and tax obligations you need to familiarise yourself with:


Value Added Tax is the consumption tax charged on goods at each stage of the supply chain from the raw material to the finished product. The rates will vary depending on your country. For example, in the UK, if your annual business turnover is more than £85,000, you must register your business to pay VAT. In Australia, you will need to register for GST (an equivalent of VAT) if your business has a turnover of A$75,000 or more from sales.

Annual accounts

An annual account, also known as an annual report, is a detailed summary of business operations throughout the financial year. Failure to submit this report by the end of the accounting deadline could result in a hefty fine.

Income tax rates

Income tax is the amount you should pay to the federal government concerning your revenue each month. Again, the laws will depend on the country where you are doing business. In the UK for example, an income of between £12,500 and £50,000 will attract a 20% income tax rate. Any income above £50,000 will be taxed at 40%.

In Australia, there are rates for local resident employees and foreign residents. There are also rates for working holidaymakers. As a business, you are required to remit employee income taxes and any insurance contributions on income to avoid hefty fines.

Tip: This is just a snapshot of common business tax obligations. You should ensure you are conversant with all the taxes you should pay as required by the law in the country where you are running your business.

Key small business accounting basics

Now, basic tasks such as filing taxes and bookkeeping provide vital information that will help you run your enterprise more effectively. Bookkeeping is essentially the practice of recording and maintaining crucial business financial records. Examples of bookkeeping tasks include managing the payroll, keeping a record of all transactions, tax preparation, and formulating financial statements and reports. Proper accounting will keep your business safe from hefty fines for compliance issues. It will also help you manage expenses and improve your profits.

First and foremost, you need to create a separate business account for your business, even in cases where you are not registered as a limited company. As a small business owner, you can’t do it all, though! It is best to hire an accountant to help take the load off your shoulders. A qualified accountant will provide expert advice on how you can grow your small business.

Important forecasting and financial planning documents for your small business

You also need to keep an eye on your financial documents. They can help you prove to investors and auditors that your business is viable. These documents also help you keep track of internal revenue and expenses. The four main documents you need to have and regularly maintain for your small business include a profit and loss statement, a breakeven analysis, a balance sheet, and a cash flow statement. An added advantage of maintaining these financial documents is the identification of potential risks and pitfalls that could lead to the failure of your business.

Proper management of small business cash flow

Money flows into your business as income when customers purchase your products/services and flow out when you pay for expenses such as wages and rent. In financial accounting, this is known as cash flow. It can be negative or positive. During the first few months of launching your business, you might experience a negative cash flow keeping in mind that expenses are still high and clients are not streaming in to buy your products. According to experts at Virtual CFO Melbourne, a proper cash flow management can help you avoid unexpectedly running out of cash. In simple words, your business shouldn’t be spending more than it earns! Experts also advise that you have a supplemental source of income such as a savings account to cushion you till you get on your feet.

Managing debt

Unless your pockets are very deep, you will most likely rely on debt financing to kick start your business operations. However, you must avoid a situation where your debts spiral out of control. Key steps you can take to manage your debt include cutting back on unnecessary expenditure until you can comfortably manage your debt. You could also pay off loans with a higher interest rate and ask your suppliers for discounted rates.

If you have a history of making prompt payments, your suppliers are more likely to negotiate with you at a fair price. Another effective way to manage your small business debt will be to have a rainy day fund if you encounter unexpected costs. You could dip into this savings account while figuring out how to repay your debt.

Finance options for small businesses

Business finance is the money an entrepreneur produces to launch and develop their small business. How you go about securing funds for your business will determine whether you succeed or fail. The two main types of business financing include debt financing and equity financing. In equity financing, an investor provides a certain sum, and they become a shareholder in your business in exchange.

On the other hand, in debt financing, a creditor agrees to lend you money on the condition that you will repay the money with interest over a certain period. You could also raise money for your business through crowdfunding, invoice finance, venture capital, bank loans, and small business grants. Ensure you look into the pros and cons of each of the methods stated above and determine the most appropriate finance option for your small business.

Wrapping up

Financial management should be at the forefront of everything you do if you want your small business to grow. A deep understanding of the numbers that drive your business will help you mitigate risks and help you make informed decisions. Financial management will also help you know when to cut costs or when the timing is right to invest in your growth. It is thus vital to hire financial experts to help your business stay on top of money matters!

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