Managing Your Finances

7 Money Management Strategies Every First-Time Business Owner Should Know

Being a small business owner is all about following your dreams and calling your own shots. But it’s also about managing your money responsibly and keeping a tight grip on your finances.

Your current financial situation may not be as complicated as, say, running a major corporation, but there are still several financial best practices you should be aware of. Here are 7 money management strategies you should know about to ensure your long-term financial success.

1. Create a Budget and Adjust Accordingly

When you want to manage your money better, creating a budget is the first place to start. Many small business owners skip budgeting because it’s difficult to estimate what you’ll spend when you’re new in business and don’t have prior period numbers to use as a starting point.

Still, you should try to create a budget and track your spending habits. It’s okay if your actual numbers aren’t spot on—even established businesses see variances—but the process will make you more thoughtful about how you’re spending your revenues and what you can do to improve next year.

How to put it into action: Start by figuring out how much you bring in on a monthly basis, then deduct fixed costs that are the same each month. Things like subscriptions, rent, salaries, and insurance typically don’t change from month to month, so they’re easy to predict. Then fill in the variable costs (those that vary from month to month) and one-time purchases.

Once you’ve created your budget, look at how your actual numbers compare to your estimates each month, quarter, or year. With time and experience, your budgets will become more accurate.

2. Get Your Cash Flow Organized

When starting your business, keep track of all income and expenses from day one—even if most of your numbers are zero.

It’s easy to let managing your business finances fall behind when you’re focused on the million other things you need to do to get your business off the ground. But staying on top of your accounting is incredibly important.

You’ll be thankful you took the time to set up your finances and get organized at tax time and when your business grows to the point you need to hand the daily accounting tasks off to someone else.

How to put it into action: Start using cloud-based accounting software from day one. There are plenty of low-cost options to choose from while you’re starting out.

While some small business owners start out with a simple spreadsheet for tracking income and expenses, cloud-based accounting software can end up paying for itself when you consider the time saved from automating invoices, following up on past-due accounts, and attaching receipts with just the click of your smart phone’s camera.

3. Pay Your Bills on Time

Have you ever forgotten to make a credit card payment, only to find an exorbitant fee tacked on to your bill later on? Well, the same can happen to your business too. And if you’re not careful, late fees and penalties can suck substantial funds from your bank account before you even realize it.

Every dollar you earn is crucial when you’re bootstrapping your small business or working with limited funds. You don’t want to spend your hard-earned money on things that don’t offer value for your company.

Late payments can also lower your business credit score—making it difficult to secure funding in the future—and hurt the relationships you’ve built with your vendors, so it’s important to maintain good credit habits and make payments on time.

How to put it into action: Your first order of business is to keep track of all your payments. You have a few options here:

• Write them down in a place you’ll look at often
• Put them on your calendar or on a spreadsheet
• Hire someone to manage your bills for you

If possible, put your bills on auto-pay so you’ll never have to think about them again. You can say goodbye to late payments for good in just a few minutes.

4. Save for Retirement (Yes, Really!)

New business owners usually try to invest as much as they can back into the business to help it grow. That’s smart, but don’t forget to plan for your financial future—your retirement—while you’re at it.

Being self-employed often means you no longer have access to an employer-sponsored 401(k) investment account to save for retirement, so taking charge of your retirement fund yourself is all the more important.

How to put it into action: Talk to a certified financial planner or financial advisor about your options for setting up a SEP-IRA, SIMPLE IRA, Solo 401(k), or SIMPLE 401(k) savings account. Because retirement savings accounts help you take advantage of compound interest over time, the sooner you open an account, the better.

Research what these plans offer and how they can help you meet your retirement goals. You don’t have to funnel a ton of money towards your retirement account, but whatever you can save now may help curb your tax bill and grow tax-deferred until you need to access it in retirement.

5. Establish an Emergency Fund

An emergency fund isn’t just for your personal finances. Business owners should have one, too. Odds are, your business will eventually face a less than stellar month or an unexpected expense, so it’s essential to plan for these cash crunches.

Without an emergency fund in place, something as small as a late-paying client or fried laptop can spell disaster. Hits like this to your monthly income can lead to not being able to pay important bills or cover payroll.

Credit cards or other short-term loans are an option in a pinch, but they typically come with hefty interest rates. They may solve your problems in the short term, but end up costing more and creating more cash flow issues and debt obligations in the long run. When it comes to credit cards, staying debt-free and avoiding the trap of “minimum payments” is a smart move.

How to put it into action: The hardest part of creating an emergency fund for your small business may be finding the money to put away. While reinvesting in your business is important, look for ways to cut costs or make more money.

Save your emergency fund in a savings or money market account rather than investing it. That way your money is easily accessible when you really need it and still earning interest (at least a little bit). Three to six months of expenses is ideal, but don’t despair if you can’t reach that goal right away. Start small and build your emergency fund while you grow your business.

6. Cut Costs Where You Can

Expenditures are an unavoidable part of business. Once you get to a certain point, spending money becomes essential for your success. You might hire a coach or pay for training if you’ve reached a plateau in your business, for example. Perhaps you increase your marketing budget to get more eyes on your new product line.

Still, you’ll want to keep costs as low as possible if you want to grow your business. Fewer profits mean less money to invest in your company’s future and a shorter financial runway when times get tough.

How to put it into action: Take stock of your business expenses, including your software and apps, on a regular basis and decide whether you really need them. Does each one move your business forward in a measurable or meaningful way?

If you’re having trouble justifying your software expenses, see if you can find a tool that tackles multiple needs. Accounting software like FreshBooks, for instance, handles invoicing, billing, time tracking, and more. By using software that packages multiple features together, you avoid paying for each one separately.

And if you find yourself overpaying for some vendors, shop around for alternatives or consider negotiating a lower rate with them.

7. Remember That Time is Money

New business owners often start out with one person running the show. Marketing and sales, accounting and product design, shipping, and customer service—it’s all in a small business owner’s job description. But as you grow, it’s important to know which tasks you excel at and which ones you probably have no business doing.

Sure, you can read through thousands of pages of tax code and spend 12 hours preparing your own tax return, but what is the opportunity cost of those 12 hours? Could you pay someone else a fraction of that to handle filing a tax return for you?

How to put it into action: Once you have enough revenue-producing work to keep you busy 40 hours a week, start looking for tasks to outsource. You might work with an outside accountant to ensure your books are in order, hire a virtual assistant to handle email and other routine tasks, or outsource your social media to someone who can grow your online presence.

Your Financial Security Starts With You

Running a small business is no easy task, but managing money is easier when you stay organized and disciplined.

When you dive in and get comfortable with your  business finances, you’ll have a better idea of how your business is really doing, where improvements are needed to hit your financial goals, and where growth is possible.

Remember, there’s no free money out there, but you can certainly make the most of your dollars with diligence, planning, and smart money management. The money management tips above are an excellent place to start and will help ensure that you and your small business thrive.